UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549

                            FORM 10-K

                            (Mark One)

(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
     DECEMBER 31, 1997.

                                OR

( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934 For the transition period
     from _____________ to

                 Commission File Number 33-96884

                     VANGUARD AIRLINES, INC.
      (Exact name of Registrant as specified in its charter)
     Delaware                              48-1149290
(State or other jurisdiction            (I.R.S. Employer
of incorporation or organization)  Identification Number)

                       30 N.W. Rome Circle
                         Mezzanine Level
                Kansas City International Airport
                   Kansas City, Missouri 64153
                          (913) 789-1388
   (Address of principal executive offices, including zip code;
       Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:  NONE

   Securities registered pursuant to Section 12(g) of the Act:

             Common Stock, par value $0.001 per share
                         (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                 Yes     X             No ______

     Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [  ]

     At March 3, 1998, there were 45,694,816 shares of Common
Stock outstanding, of which 37,555,883 shares were owned by
affiliates.  The aggregate market value of the outstanding Common
Stock of the Registrant held by non-affiliates, based on the
average of bid and asked prices of such stock on March 3, 1998 of
$0.59, was $4,801,970.47.

     Documents incorporated by reference: Portions of the
Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.



<PAGE>


PART I

ITEM 1.  BUSINESS

GENERAL

     Vanguard Airlines, Inc. ("Vanguard" or the "Company") was
incorporated in Delaware on April 25, 1994.  The Company's
principal offices are located at 30 N. W. Rome Circle, Mezzanine
Level, Kansas City International Airport, Kansas City, Missouri
64153, and its telephone number is (913) 789-1388.

     Vanguard is a lowfare airline offering convenient, non-stop
and connecting scheduled jet service to destinations in
established markets for both business and leisure travelers.  The
Company currently operates nine leased Boeing 737200 jet
aircraft.  The Company's schedule provides an average of 54 daily
weekday flights serving Kansas City, Atlanta, Chicago-Midway,
Dallas/Fort Worth, Denver, Minneapolis/St. Paul, Pittsburgh, and
New York City-JFK.  In January 1998, the Company signed a letter
of intent to lease its tenth Boeing 737-200 jet aircraft with
delivery anticipated in mid-May 1998.  The Company also provides
limited charter services.  The Company has experienced
significant growth since the commencement of operations in
December 1994, and has achieved operating revenues of
approximately $36.2 million for the year ended December 31, 1995,
$68.6 million for the year ended December 31, 1996 and $81.4
million for the year ended December 31, 1997.  However, despite
this significant growth in revenue levels, the Company to date
has yet to report a profitable quarterly reporting period.

     THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AND
INFORMATION THAT ARE BASED ON MANAGEMENT'S BELIEFS AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO
MANAGEMENT.  WHEN USED IN THIS DOCUMENT, THE WORDS "ESTIMATE,"
"ANTICIPATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.  THE ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE CURRENTLY
ANTICIPATED.  FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, AVAILABILITY OF WORKING CAPITAL AND
FUTURE FINANCING RESOURCES, GENERAL ECONOMIC CONDITIONS, THE COST
OF JET FUEL, THE OCCURRENCE OF EVENTS INVOLVING OTHER LOW-COST
CARRIERS, THE CURRENT LIMITED SUPPLY OF BOEING 737 JET AIRCRAFT
AND THE HIGHER LEASE COSTS ASSOCIATED WITH SUCH AIRCRAFT,
POTENTIAL CHANGES IN GOVERNMENT REGULATION OF AIRLINES OR
AIRCRAFT AND ACTIONS TAKEN BY OTHER AIRLINES PARTICULARLY WITH
RESPECT TO SCHEDULING AND PRICE IN THE COMPANY'S CURRENT OR
FUTURE ROUTES.  FOR ADDITIONAL DISCUSSION OF SUCH RISKS, SEE
"BUSINESS -- FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS."

COMPANY'S LOW-FARE SERVICE

     The Company's low-fare service is designed to meet the needs
of, and stimulate demand among, price-sensitive business and
leisure travelers.  To compete favorably, low-fare airlines must
offer services that are price competitive with other airlines in
its markets and, particularly with respect to short-haul markets,
are competitive with ground transportation alternatives.  The
Company typically offers its airline services at fares that are
substantially lower than fares offered prior to its entry into
its markets, especially with respect to reservations made within
seven days of departure.  The Company's fares, however, are
typically matched by the incumbent carriers, especially with
respect to reservations made more than seven days prior to
departure.  The Company believes its low-fare strategy will
continue in light of the Company's cost structure; however, the
Company has marginally increased fares in most markets.

     In October 1997, the Company purchased and installed an
enhanced revenue management system that monitors its fares and
inventory in each of its markets.  The primary price categories
are: (i) promotional; (ii) 14-day advance; (iii) seven-day
advance; (iv) one-day advance and (v) walk-up.  Within each
primary category, there are smaller fare price increments that
are tailored to specific conditions and historical operating
data. The <PAGE> purpose of the revenue management system is to achieve
and maintain acceptable load factor and yield levels in each
market, thereby maximizing revenue per available seat mile
("ASM").

     Most of the Company's fares are sold on a nonrefundable
basis and do not require a minimum or a Saturday night stay.
Customers who change their itinerary on a nonrefundable ticket,
or who fail to use a purchased flight reservation when scheduled
and provide advance notice to the Company, may apply the funds
toward the purchase of another Vanguard flight for use within 180
days of the scheduled flight date, subject to a $50 service
charge. As a result of its primarily nonrefundable fare
structure, the Company's passengers typically take their
designated flights, and the Company believes its "no-show" rate
is approximately 6%.  In addition, the Company began selling
refundable fares during the fourth quarter of 1997 and, as a
result, began overbooking flights.

     The Company's lowfare service is intended to satisfy most of
the basic air transportation needs of the Company's targeted
customers while establishing the Company's reputation as a small
yet reliable airline where customers receive more than they
expect from typical lowfare airlines. The Company offers advance
seat assignments and more leg room than typical low-fare
airlines.  The Company believes that the basic air transportation
needs of its targeted customers can be satisfied by providing a
limited number of flights per day on most routes, lowfares, a
frequent flyer program, inflight beverages and advance seat
assignments. The Company, however, does not offer airport clubs,
city ticket offices (except for the city ticket office in
Mission, Kansas) or certain other amenities offered by many of
its competitors.  In addition, the Company does not interline
with other domestic jet airlines, which affects, but does not
prevent, the Company's ability to reaccommodate its passengers in
the event of flight cancellations or delays.  While many business
travelers select traditional airlines based on the availability
of these amenities, the Company believes that there is
substantial demand for its lowfare service both from the
pricesensitive business travelers and leisure travelers.

ROUTE SYSTEM AND SCHEDULING

     The Company serves primarily short- to medium-haul,
high-volume markets with two to four round-trip flights per day.
On March 1, 1998, the average stage length of the Company's
flights was approximately 480 miles.  Average stage length
represents the scheduled service aircraft miles flown divided by
the total number of departures. The Company has implemented
various modification to its route structure since 1994.  The
Company's original 1994 route structure was based on a point to
point strategy that focused on short- to medium-haul markets
within the Midwestern and Rocky Mountain regions of the United
States.

     In December 1996, the Company launched a hub and spoke
strategy based in Kansas City.  During the first quarter of 1997,
the Company operated approximately 60 flights per day mainly in
Kansas City and provided service to the most non-stop
destinations from Kansas City.  This schedule included three
"red-eye" flights from the West Coast (Las Vegas, Los Angeles and
San Francisco) as part of its strategy to offer more destinations
with the same number of aircraft, thereby increasing aircraft
utilization and ASM's.

     Due to poor reliability and financial performance of the hub
and spoke schedule implemented in December 1996, the Company
revised the cities it served and the related schedule in
September 1997.  The Company added service to New York-JFK from
Kansas City and terminated service to Des Moines, Las Vegas, Los
Angeles, Orlando and Tampa. The Company eliminated its "red-eye"
flying and increased times between arrivals and departures in
order to increase its reliability and on-time performance.  The
revised schedule reduced ASMs and daily average aircraft
utilization.  Unit cost increases as a result of reducing ASMs
are expected to be offset by cost reduction strategies, improved
reliability and higher fares and passenger loads in denser
markets.  In December 1997, the Company initiated service between
Chicago-Midway and Pittsburgh and Pittsburgh and New York
City-JFK, with two flights per day.  In January 1998, the Company
terminated its daily non-stop flights between Kansas City and San
Francisco.



<PAGE>




     The Company's strategy allows the Company to pursue measured
growth by expanding in existing markets as well as entering new
markets where its low cost structure, current operating
efficiencies and quality of operations can be preserved.  As of
March 1, 1998, the Company operated non-stop service in the
following markets:  (i) Atlanta and Kansas City; (ii)
Chicago-Midway and Kansas City; (iii) Chicago-Midway and
Minneapolis/St. Paul; (iv) Chicago-Midway and Pittsburgh; (v)
Dallas/Ft. Worth and Kansas City; (vi) Denver and Kansas City;
(vii) Minneapolis/St. Paul and Kansas City; (viii) New York
City-JFK and Kansas City; and (ix) New York City-JFK and
Pittsburgh.  The Company's flights are also timed to provide
connecting opportunities to and from other combinations of these
city pairs.  For example, the Company's schedule provides for
convenient direct service between Dallas/Ft. Worth and
Chicago-Midway as well as convenient one-stop service between
Atlanta, Denver, Minneapolis, Dallas, Chicago, New York-JFK via
Kansas City.

RESERVATION AND INFORMATION SYSTEMS

     In the third quarter of 1997, the Company purchased and
installed a new reservation system.  This software continues the
Company's simplified ticketless service and is an important
component of the Company's attempt to maintain its low cost
structure.  The Company's integrated reservation, marketing and
revenue accounting system is designed to capture information at
its source and eliminate paper records when possible.  The
Company's system provides immediate access to detailed market by
market data, as well as customer and financial information
obtained throughout the reservation and boarding process.  This
system also collects, organizes and stores data on customers in
support of the Company's frequent flyer program and a number of
other direct marketing efforts.  Management believes that the
ease of immediate access to timely, detailed information through
its reservation system enhances management functions.  In
connection with its new reservation software, the Company
anticipates the ability to sell tickets over the internet through
its home page on the internet, www@flyvanguard.com, in 1998.

     While a number of traditional airlines now offer ticketless
service in certain circumstances, these airlines continue to
maintain their ticketed service and the expenses associated with
the supporting accounting functions.  The Company's reservation
system and processes are entirely ticketless.  At the time a
reservation or sale is made, the Company provides its customers
with a confirmation number.  At the airport, this information is
available to the gate agent facilitating customer check-in,
effectively eliminating slow moving customer check-in lines.  The
Company's ticketless service also eliminates traditional revenue
accounting functions and the direct and indirect costs of
handling tickets.

     The Company's new reservation software permits the Company
to participate in the SABRE and WORLDSPAN Computer Reservation
Systems (CRSs).  The Company began participating in the SABRE CRS
in February 1998 and anticipates participation in the WORLDSPAN
CRS in April 1998.  Travel agents utilizing the SABRE CRS may
book seats on the Company's flights, without the need to call the
Company's reservation center. The Company's software and level of
CRS participation allows travel agents to send automated requests
to the Company's reservation system to verify availability of
seat and price; upon verification from Vanguard's reservation
system, the travel agent utilizes a credit card to complete the
automated sale.  The Company intends to continue to be a totally
ticketless operation.  The Company previously only displayed its
flight schedules in the WORLDSPAN and GALILEO CRSs and the
Company did not display its schedule in the much larger SABRE CRS
system.  The Company will continue to display its flights in the
GALILEO CRS, but travel agents who utilize the GALILEO CRS will
have to call the Company's reservation center to book a flight.

     At present, the Company does not intend to participate in
the Airline Reporting Corporation ("ARC"), the airline industry
collection agent for travel agency sales.  Currently, at the time
a travel agency reservation or sale is made, the Company
identifies the travel agency making the booking, by either taking
credit card information or charging the travel agency's account
for future collection.  Each travel agency then receives an
invoice summarizing these transactions.  Effective April 1, 1998,
the Company intends to require most travel <PAGE> agencies to pay by
credit card.  Although travel agencies are most accustomed to
doing business through ARC, the Company believes that the cost
savings realized by avoiding the fees, ticket handling and
revenue accounting costs inherent in the ARC system justify the
Company's decision not to participate in ARC.  The Company's
participation in the SABRE and WORLDSPAN CRSs will require the
travel agent to utilize a credit card to guarantee the completion
of the sale.  The Company refers to this guaranteed credit card
process as "guaranteed ticketing."  Under guaranteed ticketing,
the Company collects cash from the travel agency bookings
directly from the credit card processor.  Further, the importance
of collecting outstanding travel agency bookings is diminished
regardless of whether the Company participates in ARC or
maintains its own internal billing and collection functions.

     In the future, the Company may encounter problems with
features added to its computer system, with new computer hardware
provided by third parties or with a greater volume of
reservations.  If the Company experiences a system failure,
revenues may be lost or significant expenses incurred in
repairing, modifying or replacing the system. With its ticketless
service, the Company is dependent on its computerized reservation
system for information regarding confirmed passengers and flight
schedules.

MARKETING AND PROMOTION

     A majority of the Company's customers call its reservation
center directly to make their reservations.  As a result, the
Company advertises directly to potential customers using
primarily newspapers, television and radio. The Company's
advertisements feature the Company's destinations, lowest
available fares and the Company's toll free phone number,
1800VANGUARD.  Currently, the marketing efforts of the Company
are concentrated on price and destination advertisements.  The
Company recently introduced numerous initiatives designed to
capture a larger share of the business traveler market.  In
November 1997, the Company launched a new class of service called
Road Warrior Class SM to attract more business travelers.  The
Company's Road Warrior Class SM offers among other amenities,
guaranteed timely arrivals, guaranteed seats on every flight,
preferred seating, pre-assigned seating, refundable tickets, no
change fees and a business class hotline.  In addition to its
Road Warrior Class,SM the Company now aggressively pursues group
and bulk ticket sales.

     Approximately 40% of the Company's customers use travel
agents to make their reservations. The Company has implemented
marketing strategies and programs to build on its relationships
with travel agencies throughout its route system.  The Company
has maintained its 10% commission paid to travel agents as well
as occasionally matching such commission with an equivalent 10%
travel credit that agencies may use on future Vanguard flights.
The Company also communicates regularly with travel agents
through personal visits, parties, direct mail and telemarketing.
The Company anticipates increased travel agent bookings due to
its participation in the SABRE CRS and projected participation in
the WORLDSPAN CRS.  See " Reservation and Information Systems."

     The Company's frequent-flyer program, Vantage Points,SM
awards free round-trip tickets on Vanguard to customers who
complete 16 Vanguard flights, or eight round trips, within any 12
month period.  In addition to its standard frequent flyer
program, the Company on occasion accelerates rewards on its
frequent flyer program.  The Company is currently working on
further enhancements and partnerships to its frequent flyer
program in order to establish more active communication with
frequent flyers and partners.  The Company's new reservation
software is expected to be more effective than the Company's
previous system in achieving these goals.

MOTIVATED AND TRAINED WORKFORCE

     The Company believes that the success of an airline is
dependent in large part on the attitudes of its people.  The
Company has developed a corporate culture that provides an
environment of relaxed, casual professionalism for its employees.
The Company attempts to provide a working environment conducive
to <PAGE> personal responsibility, creativity, accountability and
commitment.  The Company has created an informal atmosphere and
employed a horizontal management structure to facilitate
communication throughout the organization.  To keep all employees
informed about the Company's status and developments, the Company
hosts a monthly question and answer session with the Company's
Chairman of the Board, Chief Executive Officer and President,
Robert J. Spane, and other executive officers of the Company.  In
addition, the Company established an information line, which Mr.
Spane updates regularly, and a marketing news line, to improve
the flow of information and communications throughout the
Company.

     The Company seeks to select, train and maintain a highly
productive workforce of skilled, enthusiastic and energetic
employees and reward them for performance by allowing them to
share in the Company's success.  Management believes that its
base wage and benefit levels are generally at market rates of
other similar airlines.  The Company expects to maintain a
motivated workforce through its selection process and a casual
and friendly working environment.  In addition, the Company has
implemented a 401(K) plan, employee stock purchase plan and
adopted a profit sharing plan.  In August 1997, Mr. Spane
implemented a Company wide incentive plan that gives each
employee $25.00 per week if the Company meets certain operating
performance criteria with respect to on-time performance and
flight completion goals.  The Company expects that the
aforementioned programs will further align the interests of its
employees, the Company and its customers.

     The airline business is highly regulated.  Regulations
promulgated by the Federal Aviation Administration ("FAA")
require pilots to be licensed as commercial pilots, with specific
ratings for aircraft to be flown and to be medically certified as
physically fit.  Licenses and medical certification requirements
are subject to periodic continuation requirements including
recurrent training and recent flying experience. Both pilot
training and mechanic training for the Boeing 737200 jet aircraft
are generally provided by independent contractors, including
other airlines.  Currently, the average age and flight time of
the Company's pilots is 41 years and 6,400 hours, respectively.
Mechanics, quality control inspectors and flight dispatchers must
be licensed and qualified for the Company's aircraft.  Flight
attendants must have initial and periodic training and
certification.  All of these employees are subject to
preemployment and subsequent random drug and alcohol testing.
Training programs are subject to approval and monitoring by the
FAA.  Management personnel directly involved in the supervision
of flight operations, training, maintenance and aircraft
inspection must meet experience standards prescribed by the FAA
regulations.

     Many airlines are unionized.  Management has attempted to
create an environment that is informal and that facilitates the
free flow of communication, which may reduce employees' desires
to be represented by unions.  If the employees eventually seek
representation, the impact on the Company may be material and
adverse, although the Company believes that its lowcost structure
is derived from its simplified procedures and not simply from its
employee compensation structure.  The Company is unable to
predict whether any of its employees will elect to be represented
by a labor union.

AIRPORT OPERATIONS

     The Company currently serves eight airports.  The Company
has leases with the appropriate airport authorities at certain
airports and sublease or handling arrangements directly with
signatory airlines at other airports.  Most of the sublease or
handling arrangements, as discussed below, can be terminated by
the other airlines or the Company upon 30 to 60 days notice.  If
such a termination were to occur, the Company would have to make
alternative arrangements or cease operations at the affected
airport.  There can be no assurance that alternative arrangements
would be available at all or at a reasonable cost.  Although the
Company's flights at New York City-JFK are scheduled to operate
at times during the day that do not require slot allocations or
exemptions, the Company has filed a slot application with the
Department of Transportation ("DOT") in order to operate certain
flights in slot-controlled times.  There can be no assurance that
the Company's slot application will be successful.  See
" Government Regulation."



<PAGE>




     Ground handling services typically involve (i) public
contact services, such as meeting, greeting and serving the
Company's customers at the checkin counter, gate and baggage
claim areas and (ii) underwing ground handling services such as
marshaling the aircraft into and out of the gate, baggage loading
and unloading, as well as lavatory and water servicing, deicing
and certain services provided to the aircraft overnight.  Public
contact services at the Company's various airports are conducted
by the Company's full- and part-time employees.  Underwing ground
handling services are primarily provided by other airlines and/or
fixed based operators. The Company performs its own underwing
ground handling services at Chicago-Midway Airport.

AIRCRAFT

     The Company's aircraft fleet consists of nine leased Boeing
737-200 jet aircraft.  Eight of the Company's jet aircraft were
manufactured between 1968 and 1970.  One aircraft and the
aircraft scheduled to arrive in May 1998 were manufactured in
1982 and 1977, respectively.  Four of the Company's aircraft were
leased under operating leases that originally expired in 1997;
the leases provided for up to two renewal terms of two years each
with no increase in base rent.  The Company renewed the leases
for the first two-year renewal period and three leases now expire
in December 1999 and one in January 2000.  The remaining five
aircraft have varying lease termination dates:  one of its Boeing
737-200 jet aircraft has been leased for a term extendable
through 2001; two of its aircraft have been leased for a term
extendable through 2002; and two for terms extendable through
2004. The Company has options to purchase five of the Boeing
737-200 jet aircraft during the terms of their respective leases.
See "Factors That May Affect Future Results of
Operations Limited Number of Aircraft; Aircraft Acquisitions."

     All expenses relating to the maintenance and operation of
the aircraft are the Company's responsibility.  While the Company
anticipates a higher maintenance cost for older aircraft,
including costs to comply with FAA Airworthiness Directives
(AADs") and regulations for aging aircraft, the Company believes
that the total costs of operating the Boeing 737-200 jet aircraft
is competitive with newer aircraft types because the Company's
aircraft have significantly lower acquisition or lease costs.
Lower acquisition or lease costs result in lower fixed costs,
which the Company believes will allow greater flexibility to
adjust capacity to demand.

     The Company's aircraft must be brought into compliance with
Federal Stage 3 noise level requirements in phases:  75% by
December 31, 1998 and 100% by December 31, 1999.  Currently, the
Company's fleet meets the Stage 3 noise compliance requirements
of 50%.  The Company's tenth aircraft anticipated in May 1998
will meet Stage 3 requirements.  The Company must modify one
aircraft in its existing fleet to satisfy the December 31, 1998
Stage 3 requirements. The Company believes that through the
modification of current lease terms, the acquisition of an FAA
certified hush kit would be available to allow the Company's
fleet to meet the December 31, 1998 Stage 3 requirements.

     Because the Company's aircraft fleet consists of nine
aircraft (ten in May 1998), if one or more of its aircraft was
not in service, the Company would experience a proportionally
greater loss of capacity than would be the case with a larger
airline.  Any interruption of aircraft service as a result of
scheduled or unscheduled maintenance, however, could materially
and adversely affect the Company's service, reputation and
financial performance.  In addition, the demand for Boeing 737
aircraft has increased markedly in the last two years.  In the
event the Company seeks to lease additional aircraft in order to
expand its service and/or route system, there can be no assurance
that the Company will be able to lease additional aircraft on
satisfactory terms or at the times needed.



<PAGE>




MAINTENANCE AND REPAIRS

     All maintenance and repairs are accomplished in accordance
with the Company's maintenance program approved by the FAA.
Older aircraft, in general, are likely to incur greater
maintenance expense than newer aircraft. The Company believes
that its aircraft are mechanically reliable and that the ongoing
cost of maintenance on such aircraft is, and will continue to be,
within industry norms.  The Company must comply with existing ADs
and regulations for aging aircraft issued by the FAA.  In
addition, the Company may be required to comply with future ADs
or regulations regarding maintenance and repairs.  There can be
no assurance that the Company's costs of maintenance in the
future (including costs to comply with ADs and regulations) will
fall within industry norms or that the Company's aircraft will be
reliable over time.

     Aircraft maintenance consists of routine and daily
maintenance and major overhauls.  Routine or daily maintenance is
generally performed by the Company's mechanics in Kansas City,
Chicago-Midway and Minneapolis/St. Paul or in various other
cities, as needed, by independent contractors.  The Company plans
to hire its own mechanics in Pittsburgh in April 1998 for routine
and daily maintenance requirements.  The Company employs
approximately 64 mechanics and related personnel.  The Company
has contracted with various independent FAA certified maintenance
operations to perform major scheduled maintenance.

     The Company does not own a large inventory of spare parts,
but has contracted with an independent contractor to make spare
parts available and to manage the Company's rotable stockroom in
Kansas City.  For this service, the Company pays a monthly lease
fee based on the value of the parts in stock, in addition to the
repair costs on "off" units when, and if, the inventoried parts
are installed on the Company's aircraft.  In 1997, the Company
returned its two Boeing 737-300 jet aircraft pursuant to the
terms of their respective leases and, consequently, has returned
approximately $1.1 million inventory of spare parts.

FUEL

     The cost of jet fuel is one of the Company's largest
operating expenses (approximately 17.4% of operating expenses
when including taxes and the cost of delivering fuel into the
aircraft for the year ended December 31, 1997).  The Company is
currently purchasing fuel for approximately $0.65 per gallon
(including taxes and the cost of delivering fuel into the
aircraft), which is significantly less than the 1997 and 1996
average cost of $0.74 and $0.79 per gallon, respectively.
Significant changes in jet fuel prices have materially affected
the Company's operating results in the past.  Jet fuel prices are
susceptible to international events.  The Company cannot predict
the effect of events on the future availability and cost of jet
fuel.  The Company's 737-200 jet aircraft are relatively fuel
inefficient compared to newer aircraft.  Accordingly, a
significant increase in the price of jet fuel will result in a
disproportionately higher increase in the Company's fuel expenses
as compared with many of its competitors, whose average aircraft
is newer and thus more fuel efficient.

The Company has not entered into any agreements that fix the
price of jet fuel over any period of time.  Therefore, an
increase in the cost of jet fuel is immediately passed through to
the Company by suppliers.  As a result, the Company has
experienced reduced margins due to its inability to increase
fares sufficiently to compensate for higher fuel costs and taxes.
Even if it is able to raise selected fares, the Company will
experience reduced margins on sales prior to such fare increases.
In addition to increases in fuel prices, a shortage of supply
could also have a material adverse effect on the Company's
business, financial condition and results of operations.  See
"Factors That May Affect Future Results of Operations C Fuel
Costs"

COMPETITION

     Under the Airline Deregulation Act of 1978 (the
"Deregulation Act"), domestic certificated airlines are free to
enter and exit domestic routes and to set fares without
regulatory approval, and all city pair domestic airline markets
are generally open to any domestic certificated airline.  As a
consequence, the airline industry is intensely competitive and
susceptible to price discounting.  Airlines compete primarily
with respect to fares, scheduling (frequency and flight time),
destinations, frequent-flyer programs and type (jet or propeller)
and size <PAGE> of aircraft.  The Company competes with numerous other
airlines on its routes and expects to compete with other airlines
on any future routes.  Most of the Company's competitors are
larger and have greater name recognition and greater financial
resources than the Company.  In response to the Company's
commencement of service in a particular market, competing
airlines have, at times, added flights and capacity in the market
and lowered their fares, making it more difficult for the Company
to achieve or maintain profitable operations or even maintain
operations in that market.  In the future, other airlines may set
their prices at or below the Company's fares, introduce new
nonstop service between cities served by the Company or add
additional capacity in markets served by the Company in attempts
to prevent the Company from achieving profitable operations.  The
Company may also face competition from existing airlines that may
begin serving markets the Company serves, from new low-cost
airlines that may be formed to compete in the lowfare market
(including any airlines that may be formed by major airlines) and
from ground transportation alternatives.  See AFactors that may
Affect Future Results of Operations Intense Competition and
Competitive Reaction."

GOVERNMENT REGULATION

     All interstate air carriers are subject to regulation by the
DOT and the FAA under the Federal Aviation Act. The DOT's
jurisdiction extends primarily to the economic aspects of air
transportation, while the FAA's regulatory authority relates
primarily to air safety, including aircraft certification and
operations, crew licensing and training and maintenance
standards.  In general, the amount of economic regulation over
interstate air carriers in terms of market entry, exit, pricing,
and intercarrier acquisitions and agreements has been greatly
reduced subsequent to enactment of the Deregulation Act.

     Presently, four airports, Chicago-O'Hare, New York
City-LaGuardia, New York City-JFK and Washington, D.C.-National,
are regulated by means of "slot" allocations, which represent
governmental authorizations to take off or land at a particular
airport within a specified time period.  The DOT regulations
currently permit the buying, selling, trading or leasing of
slots.  Slot values depend on several factors, including the
airport, time of day covered, the availability of slots and the
class of the aircraft.  FAA regulations require the use of each
slot at least 80% of the time and provide for forfeiture of slots
in certain circumstances without compensation.  The DOT may
require forfeiture of slots without compensation if it determines
slots are needed to meet operational needs of international or
essential air transportation.  The Company currently does not
have slot allocations or leases at New York City-JFK.  The slot
restrictions at New York City-JFK cover a five-hour period
between 3:00 p.m. and 7:59 p.m.  The Company filed an application
for slot exemption to allow the Company to offer non-stop service
between Kansas City and New York City-JFK and between Pittsburgh
and New York City-JFK. The Company's service to New York City-JFK
operates in times that are not subject to slot regulation and
consequently, the Company's arrivals and departures are timed
accordingly.  The Company's ability to expand service at New York
City-JFK is restricted by its ability to obtain a slot exemption,
to which there can be no assurance.

     Vanguard began flight operations in December 1994.  Since
then, Vanguard has had no reportable incidents to the DOT that
have involved serious bodily injury or significant damage to any
of the Company's aircraft.

     The Company's flight personnel, flight and emergency
procedures and aircraft and maintenance facilities are subject to
periodic inspections and tests by the FAA.  The Company believes
that the FAA often applies strict scrutiny to the operations of
small or startup airlines to ensure proper compliance with FAA
regulations.  FAA examiners have flown on numerous Company
flights and have subjected its flight and ground personnel to
periodic announced and unannounced reviews and inspections.  The
Company believes that its operations and compliance with FAA
regulations are within industry standards.

     The DOT and FAA also have authority under the Aviation
Safety and Noise Abatement Act of 1979, as amended, under the
Airport Noise and Capacity Act of 1990 ("ANCA") and, along with
the Environmental <PAGE> Protection Agency, under the Clean Air Act, as
amended, to monitor and regulate aircraft engine noise and
exhaust emissions.  The Company believes its aircraft comply with
all applicable FAA noise control regulations and with current
emissions standards.  See "--Aircraft" and "--Maintenance and
Repairs."



INSURANCE

     The Company carries the types and amounts of insurance
required by the DOT, which the Company believes are customary for
airlines similar to the Company, including coverage for public
liability, property damage, aircraft loss or damage, baggage and
cargo liability and workers' compensation.  While the Company
believes such insurance will be adequate as to amounts and risks
covered, there can be no assurance that such coverage will
continue to be available or that it will fully protect the
Company against all losses that it might sustain.

EMPLOYEES

     As of March 1, 1998 the Company employed approximately 456
full-time and 85 part-time employees consisting of 73 pilots, 112
flight attendants, 64 maintenance personnel, 130 station agents
and 162 management and staff personnel.  In addition, the
Company's reservation center, which is currently operated by a
third party, employed 274 full- and part-time people as of March
1, 1998.  In April 1998, upon the expiration of the management
contract with the third-party provider, the Company intends to
directly manage and hire employees to run the Company's
reservation center.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

     Vanguard's business operations and financial results are
subject to various uncertainties and future developments that
cannot be predicted.  Certain of the principal risks and
uncertainties that may affect Vanguard's operations and financial
results are identified below.

     LIMITED OPERATING HISTORY; HISTORY OF SIGNIFICANT LOSSES.
The Company has a limited history of operations, beginning flight
operations on December 4, 1994.  The Company, to date, has yet to
report profitable operations during a quarterly reporting period.
Since the Company's inception on April 25, 1994, the Company has
incurred significant losses and as of December 31, 1997 had an
accumulated deficit of $69.7 million, a stockholders' deficit of
$11.9 million and a working capital deficit of $22.4 million.
The Company's limited operating history makes the prediction of
future operating results difficult.  There can be no assurance
that the Company will achieve profitability.

     AVAILABILITY OF WORKING CAPITAL AND FUTURE FINANCING
RESOURCES.  The airline business is extremely capital intensive,
including, but not limited to, lease payment obligations and
related maintenance requirements for existing or new aircraft.
The Company has not operated profitably during any quarterly
reporting period.  Consequently, the Company's continued
operations has been dependent upon equity and debt financings
primarily from principal stockholders.  The Company will likely
require additional financing, both short term and long term, if
it is to maintain operations and is evaluating additional sources
of working capital and other financings, but there is no
assurance that additional sources of working capital will be
available on acceptable terms, or at all.  In addition, the
Company has utilized and continues to utilize current liabilities
as an additional source of cash by delaying payments to certain
of its creditors.  Most of the Company's suppliers currently
provide goods, services and operating equipment on open credit
terms.  If such terms were modified to require immediate cash
payments, the Company's cash position and possibly its ability to
continue to operate would be materially and adversely affected.
Further, there can be no assurance that the Company's principal
stockholders will continue to provide working capital for the
Company's operations.  Any inability to obtain additional
financing when needed could require the Company to cease or
significantly curtail operations and would have a material
adverse effect on the Company's business, financial condition and
results of operations.  See "Management's Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and
Capital Resources."



<PAGE>




     ABILITY TO CONTINUE AS A GOING CONCERN; EXPLANATORY
PARAGRAPH IN ACCOUNTANTS' REPORT. The report issued by the
Company's independent auditors for the year ended December 31,
1997 contains an explanatory paragraph expressing substantial
doubt about the Company's ability to continue as a going concern.
The report states that because of the Company's net losses,
negative cash flows and working capital deficit, the Company has
been dependant upon financing from principal stockholders.  The
report further states that there can be no assurance as to the
availability of further financing and that there is substantial
doubt about the Company's ability to continue as a going concern.
See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital
Resources."

     INTENSE COMPETITION AND COMPETITIVE REACTION.  The Company
is subject to intense competition in all of its routes.  Under
the Deregulation Act, domestic certificated airlines may enter
and exit domestic markets and set fares without regulatory
approval.  All city-pair domestic airline markets, except for
those that are slot-controlled, are generally open to any
domestic certificated airline. Airlines compete primarily with
respect to fares, schedules (frequency and flight times),
destinations, frequent flyer programs and type (jet or propeller)
and size of aircraft.  The Company competes with various other
airlines on its routes and expects to compete with other airlines
on any future routes.  Most of the Company's competitors are
larger and have greater name recognition and financial resources
than the Company.  In response to the Company's commencement of
service in a particular market, competing airlines have, at
times, added flights and capacity and lowered their fares in the
market, making it more difficult for the Company to achieve
profitable operations in such markets.  In the future, other
airlines may set their prices at or below the Company's fares or
introduce new non-stop service between cities served by the
Company in attempts to prevent the Company from achieving or
maintaining profitable operations in that market.

     CONSUMER CONCERN ABOUT OPERATING SAFETY AT NEW-ENTRANT
CARRIERS OR TYPE OF AIRCRAFT.  Aircraft accidents or other
safety-related issues involving any carrier, may have an adverse
effect on airline passengers' perceptions regarding the safety of
new-entrant, low-fare carriers.  As a result, any such future
event could have a material adverse effect on the Company's
business, financial condition and results of operations, even if
such events do not include the Company's operations or personnel.
Similarly, publicized accounts of mechanical problems or
accidents involving Boeing 737s or other aging aircraft could
have a material adverse effect on the Company's business,
financial condition and results of operations, even though the
Company itself may not experience any such problems with its jet
aircraft.

     SEASONALITY AND CYCLICALITY.  The Company's operations are
dependent upon passenger travel demand.  Airlines typically
experience reduced demand at various times during the fall and
winter and increased demand for service during the spring and
summer.  Within these periods, the Company experiences variations
in passenger demand based on its particular routes and passenger
demographics.  The Company has experienced reduced demand during
the fall and winter with adverse effects on revenues, operating
results and cash flow. In addition, passenger travel in the
airline industry, particularly leisure travel, is highly
sensitive to adverse changes in general economic conditions.  A
worsening of current economic conditions, or an extended period
of recession nationally or in the regions served by the Company,
would have a material adverse effect of the Company's business,
financial condition and results of operations.

     FUEL COSTS.  The cost of jet fuel is one of the largest
operating expenses for an airline and particularly for the
Company due to the relative fuel inefficiency of its aircraft.
Jet fuel costs, including taxes and the cost of delivering fuel
into the aircraft, accounted for approximately 17.4% of the
Company's operating expenses for the year ended December 31,
1997.  The Company's average cost per gallon decreased from $0.79
per gallon in the year ended December 31, 1996, to $0.74 per
gallon in the year ended December 31, 1997.  Jet fuel costs are
subject to wide fluctuations as a result of sudden disruptions in
supply.  The Company cannot predict the effect on the future
availability and cost of jet fuel.  The Boeing 737-200 jet
aircraft is relatively fuel inefficient compared to newer
aircraft.  Accordingly, a significant increase in the price of
jet fuel will result in a disproportionately higher increase in
the Company's fuel expenses as compared with many of its
competitors who have, on average, newer and thus more
fuel-efficient aircraft.  The Company has not entered into any


<PAGE>




agreements that fix the price of jet fuel over any period of
time.  Therefore, an increase in the cost of jet fuel will be
immediately passed through to the Company by suppliers.  The
Company has experienced reduced margins at times when the Company
has been unable to increase fares to compensate for such higher
fuel costs.  Even at times when the Company is able to raise
selected fares, the Company has experienced reduced margins on
sales prior to such fare increases.  In addition to increases in
fuel prices, a shortage of supply will also have a material
adverse effect on the Company's business, financial condition and
results of operations.

     LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS.  The
Company's fleet consists of nine aircraft (the Company has signed
a letter of intent for its tenth aircraft) and if one or more of
its aircraft were not in service, the Company would experience a
proportionally greater loss of capacity than would be the case
for an airline utilizing a larger fleet.  Any interruption of
aircraft service as a result of scheduled or unscheduled
maintenance could materially and adversely affect the Company's
service, reputation and financial performance. The market for
leased aircraft has become more competitive than it was at the
time of the Company's inception, and there can be no assurance
that the Company would be able to lease additional aircraft on
satisfactory terms or at the time needed. Further, if the Company
is unable to lease additional aircraft that are in compliance
with the Stage-3 noise compliance requirements, it may have to
make significant capital expenditures to make its aircraft fleet
meet such requirements. See "Business -- Aircraft."

     GOVERNMENT REGULATION.  The Company is subject to the
Federal Aviation Act (the "Aviation Act"), under which the DOT
and the FAA exercise regulatory authority over airlines.  This
regulatory authority includes, but is not limited to: (i) the
initial determination and continuing review of the fitness of air
carriers (including financial, managerial, compliance-disposition
and citizenship fitness); (ii) the certification and regulation
of aircraft and other flight equipment; (iii) the certification
and approval of personnel who engage in flight, maintenance and
operations activities; and (iv) the establishment and enforcement
of safety standards and requirements with respect to the
operation and maintenance of aircraft, all as set forth in the
Aviation Act and the Federal Aviation Regulations.  The FAA has
promulgated a number of maintenance regulations and directives
relating to, among other things, retirement of aging aircraft,
increased inspections and maintenance procedures to be conducted
on aging aircraft, collision avoidance systems, aircraft
corrosion, airborne windshear avoidance systems and noise
abatement.  As a result of recent incidents involving airlines,
the FAA has increased its review of commercial airlines generally
and particularly with respect to small and new-entrant airlines,
such as the Company.  The Company's operations are subject to
constant review by the FAA.

      Additional rules and regulations have been proposed from
time to time in the last several years and that, if enacted,
could significantly increase the cost of airline operations by
imposing substantial additional requirements or restrictions on
airline operations. There can be no assurances that any of these
rules or regulations would not have a material adverse effect on
the Company's business, financial condition and results of
operations.

     The DOT and FAA also enforce federal law with respect to
aircraft noise compliance requirements.  The Company's current
fleet meets the current, Stage-3 noise compliance requirements
(50% of its fleet Stage-3 compliance). In the future, the
Company's aircraft fleet is required to meet the following
federal Stage-3 noise compliance deadlines: 75% of its fleet must
be Stage-3 compliant by December 31, 1998; and 100% of its fleet
must be Stage-3 compliant by December 31, 1999.

     The Company has obtained the necessary authority to perform
airline operations, including a Certificate of Public Convenience
and Necessity issued by the DOT pursuant to 49 U.S.C. Section
41102 and an air carrier operating certificate issued by the FAA
under Part 121 of the Federal Aviation Regulations.  The
continuation of such authority is subject to continued compliance
with applicable rules, regulations and laws pertaining to or
affecting the airline industry, including any rules and
regulations that may be adopted by the DOT and FAA in the future.
No assurance can be given that the Company will be able to
continue to comply with all present or future rules, regulations
and laws or that such rules, regulations and laws would not
materially and adversely affect the Company's business, financial
condition and results of operations.




<PAGE>




ITEM 2.  PROPERTIES

     The Company leases approximately 11,000 square feet of
office space at Kansas City International Airport ("KCI") for
corporate, operation and quality assurance functions under a
lease that expires in 1998.  The Company leases approximately
12,000 square feet from Trans World Airlines near KCI for
training, purchasing and aircraft parts inventory functions
pursuant to a month to month lease.  The Company leases
approximately 17,000 square feet of office space in Mission,
Kansas for corporate offices and reservation's center, under a
lease that expires in September 1999.  The Company intends to
consolidate its office space at KCI used for corporate, operation
and quality assurance functions to a Trans World Airlines, leased
building in May 1998. The Company also leases approximately 7,250
square feet in Lawrence, Kansas, which was used as one of its two
reservations facilities.  The Company closed its Lawrence, Kansas
reservation center in September 1997.  The Company has subleased
this center to an independent call center operator since
September 1997 and is in current discussions to sublease or
assign the remaining three years of its lease to a third party.

     The check-in counters, gates and airport office facilities
at each of the airports the Company serves are leased from the
appropriate airport authority or other airlines pursuant to
subleases or other arrangements.  Such arrangements may include
baggage handling, station operations, cleaning and other
services.  If such facilities at current or new cities served by
the Company are not available to the Company at acceptable rates,
or if such facilities become no longer available to the Company
at acceptable rates, the Company may choose not to service such
markets.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not involved in any material litigation or
legal proceedings at this time and is not aware of any material
litigation or legal proceedings threatened against it.

ITEM 4.  SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the stockholders of
the Company during the fourth quarter of the fiscal year ended
December 31, 1997.

ITEM 4A.  EXECUTIVE OFFICERS OF THE COMPANY

     The following table sets forth the names, ages and positions
of the Company's executive officers and directors as of March 1,
1998:

     Name                Age       Position

Robert J. Spane          57        Chairman of the Board, Chief
                                   Executive Officer and
                                   President
James E. Eckart          54        Vice President - Customer
                                   Relations
William A. Garrett       33        Vice President - Finance and
                                   Chief Financial Officer
Brian S. Gillman         28        Vice President, General
                                   Counsel and Secretary
James B. Miller          59        Vice President - Maintenance
William F. McKinney      58        Vice President - Operations
Russell Winter           31        Vice President - Marketing and
                                   Planning
Lee M. Gammill, Jr.      63        Director
Denis T. Rice            65        Director



<PAGE>




     Set forth below is a description of the business experience
of each executive officer and director of the Company.

     VICE ADMIRAL ROBERT J. SPANE USN (RET.) was elected a
director of the Company in May 1996 and elected chairman of the
Board, Chief Executive Officer and President of the Company in
June 1997.  Vice Admiral Spane served in the U.S. Navy for 35
years where his last position was Commander, Naval Air Force
Pacific, which he held from October 1993 to February 1996.  Vice
Admiral Spane, as Commander, Naval Air Force Pacific, was
responsible for all finances, training, logistics and the
material condition of all aircraft carriers, aircraft and naval
air stations in the Pacific.  Vice Admiral Spane retired from the
U.S. Navy in February 1996. Vice Admiral Spane is a 1962 graduate
of the U.S. Naval Academy.

     JAMES E. ECKART joined the Company in July 1997 as a
customer service consultant and was appointed Vice President of
Customer Relations in August 1997.  For over 30 years Mr. Eckart
was involved in aviation-related activities as a United States
Naval Aviator, where he served most recently as a Captain. While
in the Navy, Mr. Eckart commanded aviation squadrons and major
aviation shore stations, was also involved in aviation training
and served as liaison between the U.S. Navy and the FAA.  Mr.
Eckart holds a commercial pilot license and a degree in Human
Resources Management.

     WILLIAM A. GARRETT joined the Company in June 1996 as
Corporate Controller and was appointed Vice President - Finance
and Chief Financial Officer in July 1996.  From December 1993 to
June 1996, he served as a Senior Manager with Ernst_& Young LLP.
From 1987 to 1993, he served on the staff of and as manager for
Coopers and Lybrand LLP.  Mr. Garrett is a certified public
accountant and a member of the American Institute of Public
Accountants.  Mr. Garrett obtained a B. S. Degree in Business
Administration and Accounting from Washington & Lee University.

     BRIAN S. GILLMAN joined the Company in July 1996 as Vice
President, General Counsel and Secretary.  From September 1994 to
July 1996, Mr. Gillman was an associate in the law firm of
Stinson, Mag & Fizzell, P.C., Kansas City, Missouri, where he
served as a corporate counsel for the Company.  Mr. Gillman
received his Juris Doctorate from the University of Iowa in 1994.

     JAMES B. MILLER joined the Company in April 1996 as Manager
of Maintenance Programs and Planning, was appointed to Director
of Quality Assurance in July 1997 and Vice President -
Maintenance in March 1998.  Prior to joining the Company, Mr.
Miller was employed with Trans World Airlines for 28 years. Mr.
Miller served most recently as a Staff Vice-President,
Engineering and Quality Assurance for Trans World Airlines.

     WILLIAM F. MCKINNEY joined the Company in March 1996 as
Chief Pilot and was appointed Vice President-Flight Operations in
April 1996.  Prior to joining the Company, Captain McKinney
served as a pilot for Trans World Airlines for 29 years, where he
served most recently as General Manager of Flying (Chief Pilot)
for the Western Region of the United States.

     RUSSELL WINTER joined the Company in August 1997 as Vice
President - Marketing and Planning.  From January 1995 to August
1997, Mr. Winter was a Vice President at Hambrecht & Quist, a
wholly-owned subsidiary of Hambrecht & Quist Group.  Hambrecht &
Quist is an investment banking firm based in San Francisco,
California.  Mr. Winter serves as a member of Hambrecht & Quist
TSP Investment Management Co., L.L.C. and Hambrecht & Quist TSP
II Investment Management, L.L.C., one of the general partners of
Hambrecht & Quist TSP Investors, L.P. and Hambrecht & Quist TSP
II Investors, L.P., respectively.  From August 1992 to January
1995, Mr. Winter was a Business Analyst with the Airbus Division
of British Aerospace.

     LEE M. GAMMILL, JR. was elected a director of the Company in
September 1997.  Mr. Gammill is the retired Vice Chairman of the
Board of New York Life Insurance Company.  From 1989 until he
retired in May 1997, Mr. Gammill served as the Executive Vice
President - Individual Insurance Operations at New York Life.


<PAGE>




Mr. Gammill joined New York Life in 1957 as a sales agent and
held various management and executive positions throughout his
40-year career with New York Life.

     DENIS T. RICE was elected a director of the Company in April
1997.  Mr. Rice is a director in the law firm of Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, P.C., San Francisco,
California, a firm he has been associated with since 1961.

PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
          SECURITY HOLDER MATTERS

     The Common Stock began trading publicly on the Nasdaq
SmallCap Market under the symbol "VNGD" on November_3, 1995.
Prior to that date, there was no public market for the Common
Stock.  The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Stock as
reported on the Nasdaq SmallCap Market.  The Common Stock was
delisted from the Nasdaq SmallCap Market on December 16, 1996.
The Common Stock currently trades on the OTC Bulletin Board.

                         High           Low
     1996

     First Quarter       $ 9 5/8        $6
     Second Quarter      $12 1/4        $8
     Third Quarter       $ 9 1/2        $3 7/16
     Fourth Quarter      $ 5 1/4        $1 3/4

     1997

     First Quarter       $3 1/8         $1 3/4
     Second Quarter      $2 3/16        $1 3/8
     Third Quarter       $2             $1 1/8
     Fourth Quarter      $1 1/8         $  4/10

     1998

     January             $  3/4         $  9/16
     February            $  5/8         $  5/10

     The above OTC Bulletin Board quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.  As of March 3,
1998, there were approximately 242 holders of record of Common
Stock.

DIVIDEND POLICY

     The Company has not declared or paid dividends on its Common
Stock.  The Company currently intends to retain any future
earnings to fund operations and to continue the development of
its business and, thus, does not expect to pay any cash dividends
on its common stock in the foreseeable future.

RECENT SALE OF UNREGISTERED SECURITIES

     On December 10, 1997, the Company completed its Rights
Offering, effecting the sale of 30,455,714 shares of Common Stock
for $0.50 per share.  In the Rights Offering, the Company
distributed, at no cost to holders of its Common Stock as of
October 10, 1997 ("Record Date"), nontransferable rights to
purchase shares of Common Stock.  Each record holder received two
rights for each share of Common Stock held on the Record Date.
Each right entitled the record holder to purchase one share of
Common Stock for a price of $0.50 per share.



<PAGE>




     On March 20, 1998, the Company completed a private sale of
$10.00 preferred stock units (the "Preferred Units").  Each
Preferred Unit consists of one share of Series A Preferred Stock,
$0.001 par value, and a warrant to purchase forty (40) shares of
Common Stock.  Each share of Series A Preferred Stock is
convertible at the option of the holder thereof at any time after
July 15, 1998, into the number of fully paid and non-assessable
shares of Common Stock as is determined by dividing $10.00 by the
conversion price of $0.50 per share.  In the Preferred Unit
private placement, the Company sold 151,200 and 151,162 Preferred
Units to J. F. Shea Co. Inc. and The Hambrecht 1980 Revocable
Trust, William Hambrecht as Trustee, respectively.  In addition,
the Company, under the same agreement, has the option to sell an
additional 150,000 Preferred Units under the same terms and
conditions within 90 days of March 20, 1998.

     In addition, on March 20, 1998, the Company entered into a
Note Exchange Agreement with holders of its 8% demand notes (the
"Holders").  The Holders have agreed to exchange an aggregate
amount of $9,467,741 existing 8% demand notes for new notes that
provide for automatic conversion into the Company's Common Stock
at such time as the Company has an adequate number of authorized
shares.  The Holders have also agreed to convert all outstanding
interest in connection with these 8% Demand Notes as well as
other accumulated interest associated with previous outstanding
demand notes.  The Company and the Holders have agreed to convert
approximately $958,134 in interest to Common Stock.  The
conversion price of the Notes and interest is $0.50 per share.

ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected financial data and
other operating data of the Company for the years ended December
31, 1995, 1996 and 1997.  The selected financial data in the
table have been derived from the audited financial statements of
the Company, which are included elsewhere herein.  The data
should be read in conjunction with the Financial Statements of
the Company and the related Notes thereto, and AManagement's
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.

                         YEAR ENDED     YEAR ENDED     YEAR ENDED
                         DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                            1995           1996          1997

STATEMENT OF
OPERATIONS DATA:

Total operating          $ 36,159,018   $ 68,589,101   $  81,384,138
  revenues

Total Operating            48,225,313     92,503,417     106,758,900
  expenses

Operating loss           (12,066,295)    (23,914,316)    (25,374,762)

Total other                (129,235)      (1,893,754)     (2,871,241)
 expense, net

Net loss               $(12,195,530)  $ (25,808,070) $ (28,246,003)



<PAGE>




Net loss per           $   (1.65)     $    (2.85)    $    (1.85)
  share /1/

Weighted average          7,395,921       9,056,888     15,232,901
  common shares
  outstanding /1/

OPERATING DATA:  /2/

Revenue passenger      290,030,187      667,845,140    767,239,664
  miles (RPMs)

Available seat         562,340,660    1,090,058,358  1,295,760,836
  miles (ASMs)

Load factor                51.58%          61.27%         59.21%

Break-even load            70.06%          83.87%         79.62%
  factor /3/

Passenger yield          $ 0.1172         $ 0.0973            $ 0.0998
  per RPM

Total revenue
  per ASM               $ 0.0643         $ 0.0629            $  0.0628

Operating cost
per ASM                 $ 0.0858         $  0.0849           $ 0.0824

Block hours flown         14,781             24,721            29,859

Average flight               372                530               585
  length (miles)

Operating cost per       $ 3,263          $   3,742         $  3,575
  block hour

Aircraft in service         7                     8                9
  (end of period)

Airports served
  (end of period)           9                     15                9






<PAGE>




BALANCE SHEET DATA:

Cash and cash       $ 3,491,640         $  402,083          $  1,082,712
  equivalents

Working capital      (4,172,305)        (16,296,881)           (22,352,910)
  deficiency

Property and
  equipment net       4,550,818           5,049,658              5,484,684

Total assets        16,425,698          20,318,247            24,763,884

Long-term debt               --          5,000,000             1,900,000

Total stockholders'
  equity (deficit)   3,544,633          (13,238,247)   (11,944,434)

/1/  See Note 1 of Notes to Financial Statements.

/2/  "REVENUE PASSENGER MILES" or "RPMs" represents the aggregate amount of
     miles flown by revenue passengers.  "AVAILABLE SEAT MILES" or "ASMs"
     represents the number of seats available for passengers multiplied by
     the number of miles those seats are flown.  "BREAK-EVEN LOAD FACTOR"
     represents the percentage of RPMs that must be flown for the airline to
     break-even after operating and interest expenses assuming non-passenger
     operations, primarily mail, operate at break-even.  Break-even load
     factor is calculated by taking total expenses, minus non-passenger
     revenue, divided by ASMs, divided by passenger yield per RPM.
     "PASSENGER YIELD PER RPM" represents the total passenger revenue divided
     by RPMs.  "TOTAL REVENUE PER ASM" represents total revenues divided by
     total ASMs.  "OPERATING COST PER ASM" represents operating expenses
     divided by total ASMs.  "BLOCK HOURS FLOWN" represents the time between
     aircraft gate departure and aircraft gate arrival.  "AVERAGE FLIGHT
     LENGTH" represents aircraft miles flown divided by the number of
     departures.

/3/  Excludes $1,858,767 and $1,833,335 of noncash deferred debt issuance
     cost amortization for the years ended December 31, 1997 and 1996,
     respectively.

     Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     The Company was incorporated on April 25, 1994 and operates
as a lowfare, short to mediumhaul passenger airline that provides
convenient, scheduled jet service to attractive destinations in
established markets in the United States.  The Company's flight
operations began on December 4, 1994 with two Boeing 737200 jet
aircraft operating two daily flights each way between Kansas City
and Denver and two daily flights each way between Denver and Salt
Lake City.  As of December 31, 1997, the Company operates a total
of nine leased Boeing 737200 jet aircraft, which provides an
average of 53 daily weekday flights serving Kansas City, Atlanta,
Chicago-Midway, Dallas/Fort Worth, Denver, Minneapolis/St. Paul,
Pittsburgh, New York City-JFK and San Francisco.  On January 11,
1998, the Company terminated its daily non-stop flights between
Kansas City and San Francisco.

     The Company's operating revenues are derived principally
from the sale of airline services to passengers and are
recognized when transportation is provided.  Total operating
revenues are primarily a function of fare levels and the number
of seats sold per flight.  The Company's business is
characterized, as is true for the airline <PAGE> industry generally, by
high fixed costs relative to operating revenues, and low profit
margins.  The Company's principal business strategy is to provide
airline services in established, high passenger-volume markets
that are not served by other low-fare airlines.

     The primary factors expected to affect the Company's future
operating revenues are the Company's ability to offer and
maintain competitive fares, the reaction of existing competitors
to the continuation or commencement of operations by the Company
in a particular market (including changes in their fare
structure, aircraft type and schedule), the possible entry of
other lowfare airlines into the Company's current and future
markets, the effectiveness of the Company's marketing efforts,
the occurrence of events involving other low-cost carriers,
passengers' perceptions regarding the safety of low-cost
carriers, general economic conditions and seasonality factors.
The Company's costs are affected by fluctuations in the price of
jet fuel, scheduled and unscheduled aircraft maintenance
expenses, labor costs, the level of government regulation, fees
charged by independent contractors for services provided, rent
for gates and other facilities and marketing and advertising
expenses.  The Company has a limited history of operations and
since its inception on April_25, 1994 has experienced significant
losses.  As of December 31, 1997, the Company had an accumulated
deficit of $69.7 million and stockholders' deficit of $11.9
million.  As disclosed in the audited financial statements, the
Company had a net loss of approximately $28.2 million and net
cash flows used in operating activities amounting to
approximately $26.4 million for the year ended December 31, 1997.
Additionally, at December 31, 1997, current liabilities exceeded
current assets by $22.4 million.  As a result of its limited
operating history, together with the uncertainty in the airline
industry generally, management is unable to predict the future
operating results of the Company.

     The Company has been dependent upon equity and debt
financings from its principal stockholders.  There can be no
assurance as to the availability of further financings.
Management's plans include raising additional capital and
securing additional bank financings to fund ongoing operations
and the possible expansion of operations, however, there can be
no assurance the Company will be successful in this regard.

     Certain amounts and percentages disclosed in management's
discussion and analysis of financial condition and results of
operations for the year ended December 31, 1996 have been changed
to conform to the 1997 presentation.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER
31, 1996

     OPERATING REVENUES

     Total operating revenues increased approximately 19% from
approximately $68.6 million for the year ended December 31, 1996
to approximately $81.4 million for the year ended December 31,
1997.  This increase was primarily attributable to an increase in
the number of daily flights and the number of passengers on those
flights.  During the year ended December 31, 1996, the Company
averaged 45 flights per day which increased to 50 flights per day
during the year ended December 31, 1997.  The Company began
flying a new route structure on December_21, 1996, which included
the initiation of services from Kansas City to Atlanta,
Ft._Meyers, Las Vegas, Miami, Orlando and Tampa/St._Petersburg as
well as non-stop service between Chicago-Midway and Kansas City.
This route restructuring refocused the Company's strategy by
creating a hub in Kansas City.  ASMs increased approximately 19%,
from approximately 1,090_million during the year ended December
31, 1996 to approximately 1,296 million during the year ended
December 31, 1997.  RPMs increased approximately 15%, from
approximately 668 million during the year ended December 31, 1996
to approximately 767 million during the year ended December 31,
1997.  The increase in ASMs was primarily attributable to an
increase in the number of daily flights and the addition of
destinations with greater flight lengths.  The increase in RPMs
was primarily attributable to an increase in the number of daily
flights, the number of passengers on those additional <PAGE> flights and
the addition of destinations with greater flight lengths.  These
increases in ASMs and RPMs that resulted from the December 1996
schedule change were offset by a schedule change in September
1997 that reduced or eliminated service in a number of these
cities.  The Company discontinued round trip service from Kansas
City to Des Moines, Las Vegas, Los Angeles, Orlando and Tampa/St.
Petersburg while adding round trip service from Kansas City to
New York-JFK in September 1997 and round trip service from
Chicago-Midway and New York City-JFK to Pittsburgh in December
1997.  Load factor decreased from approximately 61% for the year
ended December 31, 1996 to approximately 59% for the year ended
December 31, 1997.  This decrease was primarily the result of a
19% increase in capacity and the addition of destinations with
greater flight lengths while experiencing only a 15% increase in
RPMs.

     Passenger yield per RPM increased approximately 3% from
approximately 9.74 for the year ended December 31, 1996 to
approximately 10.04 for the year ended December 31, 1997.  The
Company initially discounted fares to stimulate travel in a
number of the new markets that were introduced in conjunction
with the Company's major route restructuring in December_1996.
The Company attempted on a number of occasions to increase fares
in most of its markets in the second and third quarters of 1997.
This strategy reduced passenger demand and, often, was not
followed by the Company's competitors in the respective markets
and, thus, limited the Company's ability to increase fares.  In
addition, with the initiation of the December 1996 route
structure, the Company's average stage length increased to
587_miles from 530_miles during the nine months ended September
30, 1997 as compared to the year ended December 31, 1996.  In
September, the Company terminated service to a number of
long-haul markets in conjunction with the Company's September
1997 schedule change, its average stage length then decreased to
554 miles in the fourth quarter of 1997.  As a result of the
Company's inability to increase fares in its markets, the Company
was required to stimulate travel by continuing to offer
discounted fares on the majority of the city pairs it served
throughout the year ended December 31, 1997.  In order to
increase fares and passenger yield effectively, the Company
focused on improving its product beginning in September 1997. The
Company's strategic plan to improve its product includes the
delivery of a reliable product with a number of amenities found
on larger, better known airlines that specifically cater to
price-sensitive business travelers.  Those amenities, include
assigned seating, refundable tickets, fixed ticket pricing under
the Road Warrior Class SM and greater frequencies between city
pairs.  The Company believes it has improved its brand awareness
in each of its markets through its direct advertising program
that was modified in August 1997.  The Company's implementation
of its strategic plan showed positive results in the fourth
quarter of 1997 with passenger yield increasing to 11.14.  The
Company anticipates the passenger yield will continue to rise in
the first and second quarters of 1998 as the Company continues to
carry out its strategic plan.  The Company, however, cannot
predict future fare levels, which depend to a substantial extent
on actions of competitors and the Company's ability to deliver a
reliable product.  When sale prices or other price changes have
been made by competitors in the Company's markets, the Company
believes that it must, in most cases, match these competitive
fares in order to maintain its market share.  The Company
believes that the negative impact of entering new markets and the
use of discounted fares should decrease as the Company increases
its overall revenue base and customer awareness and continues to
improve its service and reliability.

     The Company also generates operating revenues as a result of
service charges from passengers who change flight reservations.
For a period of 180 days (90 days prior to March 24, 1997) after
the flight date, the customer may use the value of the unused
reservation, subject to certain restrictions, for transportation,
less a $50 ($25 through October 1996) service charge.  These
operating revenues were approximately $2.1 million (approximately
3% of total operating revenues) and approximately $3.6 million
(approximately 4% of operating revenues) in the years ended
December 31, 1996 and 1997, respectively.

OPERATING EXPENSES

     Expenses are generally categorized as related to flying
operations, aircraft fuel, maintenance, passenger service,
aircraft and traffic servicing, promotion and sales, general and
administrative, depreciation and amortization and other expense,
including interest expense and amortization of deferred debt
issuance costs.  The <PAGE> following table sets forth the percentage of
total operating revenues represented by these expense categories
as well as certain other selected financial data.

                     YEAR ENDED DECEMBER 31,

                         1996           1997

                Percent of  Cents Per   Percent of Cents Per
                Revenues      ASM       Revenues      ASM


Total operating
 revenues        100.0%       6.29       100.0%      6.28

Operating
 expenses:

Flying
 operations      25.2%        1.59       21.0%       1.32

Aircraft fuel    23.3         1.47        22.8       1.43

Maintenance      23.4         1.48        23.8       1.49

Passenger
 service          9.1         0.57         9.0       0.57

Aircraft and
 traffic
 servicing       22.2         1.39        20.6       1.29

Promotion and
 sales           22.9         1.44        25.5       1.60

General and
 administration   6.4         0.40        6.0        0.38

Depreciation
 and
 amortization     2.3         0.15        2.5        0.16

Total
 operating
 expenses        134.8        8.49       131.2       8.24

Total other
 income
 (expense),
  net             (2.8)       (0.17)     (3.5)       (0.22)



<PAGE>




Net loss         (37.6%) (2.37)    (34.7%)   (2.18)

     Flying operations expenses include aircraft lease expenses,
compensation of pilots, expenses related to flight dispatch and
flight operations administration, hull insurance and all other
expenses related directly to the operation of the aircraft other
than aircraft fuel and maintenance expenses.  Flying operations
expenses decreased approximately 1% from approximately $17.3
million (approximately 25% of operating revenues) for the year
ended December 31, 1996 to approximately $17.1 million
(approximately 21% of operating revenues) for the year ended
December 31, 1997.  In late 1995 and early 1996, the Company
leased two Boeing 737-300 jet aircraft that were newer, more
advanced aircraft and have a larger capacity and substantially
higher lease and insurance costs.  The decrease in flying
operation expenses in 1997 was primarily the result of the return
of these two Boeing 737-300 jet aircraft to the lessor in May and
July 1997.  In addition, the Company was successful in
negotiating more favorable hull insurance rates on its fleet in
1997 as compared to 1996.  These decreases were offset by
increases in pilot compensation directly related to the increase
in block hours.  Block hours increased to 29,859 in 1997 from
24,721 in 1996.  Flying operations expenses decreased as a
percentage of operating revenue as a result of the increase in
flying and revenue generated from the Company's fleet, especially
the 737-300 and long-range 737-200 jet aircraft, during the first
eight months of 1997 versus the same period in 1996.

     Aircraft fuel expenses include the direct cost of fuel,
taxes and the costs of delivering fuel into the aircraft.
Aircraft fuel expenses increased approximately 16% from
approximately $16.0_million (approximately 23% of operating
revenues) for the year ended December 31, 1996 to approximately
$18.6_million (approximately 23% of operating revenues) for the
year ended December 31, 1997.  Higher fuel expense is directly
related to the increase in ASMs flown by the Company offset by a
decrease in cost per gallon in the year ended December 31, 1997
versus 1996.  Fuel cost per ASM decreased 0.044 or 3% from 1.474
in the year ended December 31, 1996 to 1.434 in the year ended
December 31, 1997 primarily due to a decrease in average fuel
price per gallon.  Specifically, the average price decreased from
$0.79 per gallon (including taxes and into-plane costs) in the
year ended December 31, 1996 to $0.74 per gallon in the year
ended December 31, 1997, a 6% decrease.  The Company will seek to
pass on any significant fuel cost increases to the Company's
customers through fare increases as permitted by then current
market conditions; however, there can be no assurance that the
Company will be successful in passing on increased fuel costs.

     Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft.  Maintenance expenses increased approximately 20% from
approximately $16.1_million (approximately 23% of operating
revenues) for the year ended December 31, 1996 to approximately
$19.3_million (approximately 24% of operating revenues) for the
year ended December 31, 1997.  This increase was primarily due to
the increase in block hours and cycles flown.  In addition,
during the later part of 1996 and 1997, the Company incurred
charges related to certain Boeing_737-200 jet aircraft that were
in excess of what traditionally had been accrued by the Company
for major scheduled airframe, engine and landing gear maintenance
checks.  The Company attributes the increase in costs associated
with major scheduled airframe, engine and landing gear
maintenance checks to the following: a change in the vendors
providing the major scheduled overhaul services; the lack of
available overhauled/used engine and landing gear replacement
parts; and the funding of nonroutine airframe repairs not
normally experienced during major scheduled airframe overhauls.
As a result, in the fourth quarter of 1996 and again in the
second quarter of 1997, the Company increased the monthly
maintenance provisions for major scheduled maintenance checks.
In the second quarter of 1997, the Company also provided for the
underaccrual of completed major air frame maintenance checks.
The Company deposits funds with its aircraft lessors to cover a
portion of or all of the cost of its future major scheduled
maintenance for airframes, engines, landing gears and APUs.  The
costs of routine aircraft and engine maintenance are charged to
maintenance expense as incurred.  Additionally, the Company
significantly increased the capacity of its in-house maintenance
department subsequent to January 1, <PAGE> 1997.  The Company's
maintenance administration function expanded by eight employees
to insure compliance with all FAA and DOT regulations and
requirements.  The Company also increased line maintenance
personnel by twelve employees including the introduction of
maintenance operations at the Chicago-Midway and Minneapolis/St.
Paul airports.

     Passenger service expenses include flight attendant wages
and benefits, in-flight service, flight attendant training,
uniforms and overnight expenses, inconvenience passenger charges
and passenger liability insurance.  Passenger service expenses
increased approximately 18% from approximately $6.2_million
(approximately 9% of operating revenues) for the year ended
December 31, 1996 to approximately $7.3_million (approximately 9%
of operating revenues) for the year ended December 31, 1997.
This increase was primarily due to the 19% increase in ASMs and
the 15% increase in RPMs which directly resulted in an increase
in flight attendant wages and inconvenienced passenger charges.
These increases were offset by cost savings from the reduction in
the Company's passenger liability insurance rates.  Passenger
service expenses per ASM remained consistent at approximately
0.574 for the year ended December 31, 1996 and 1997.

     Aircraft and traffic servicing expenses include all expenses
incurred at the airports for handling aircraft, passengers and
mail, landing fees, facilities rent, station labor and ground
handling expenses.  Aircraft and traffic servicing expenses
increased approximately 10% from approximately $15.2_million
(approximately 22% of operating revenues) in the year ended
December 31, 1996 to approximately $16.7_million (approximately
21% of operating revenues) in the year ended December 31, 1997.
This increase was primarily due to an increase in the number of
cities served during the first nine months of 1997 and an
increase in the number of departures.  Departures increased
approximately 11% from 16,383 during the year ended December 31,
1996 to 18,195 during the year ended December 31, 1997.  The
decrease in aircraft and traffic servicing as a percentage of
operating revenues was primarily attributable to station
personnel cost, landing fees and other traffic servicing costs
not rising in proportion to the increases in the number of
passengers and RPMs between the year ended December 31, 1997 and
the year ended December 31, 1996.  The decrease of .104 per ASM
was primarily due to the 10% increase in average stage length
from 530 miles in 1996 to 585 miles in 1997.

     Promotion and sales expenses include the costs of the
reservations functions, including all wages and benefits for
reservations, rent, electricity, telecommunication charges,
credit card fees, travel agency commissions, advertising expenses
and wages and benefits for the marketing department.  Promotion
and sales expenses increased approximately 32% from approximately
$15.7_million (approximately 23% of operating revenues) in the
year ended December 31, 1996 to approximately $20.7_million
(approximately 26% of operating revenues) in the year ended
December 31, 1997.  This increase was primarily the result of an
increase in cities served, reflecting the Company's practice to
increase advertising when new cities are introduced in order to
create brand awareness in addition to the Company's strategy to
increase spending on advertising programs in existing cities.
The Company incurred significant increases in late 1996 and early
1997 promoting its major route restructuring, which created a hub
in Kansas City.  The Company continues to rely on its direct
advertising methods to attract its passengers and therefore
continued to incur significant advertising expenses in each month
and with each of its schedule changes. The average promotion and
sales cost per passenger increased $3.31 or 27% from $12.47 in
the year ended December 31, 1996 to $15.79 in the year ended
December 31, 1997.

     General and administrative expenses include the wages and
benefits for the Company's corporate employees and various other
administrative personnel, the costs for office supplies, office
rent, legal, accounting, insurance, and other miscellaneous
expenses.  General and administrative expenses increased
approximately 12% from approximately $4.4 million (approximately
6% of operating revenues) in the year ended December 31, 1996 to
approximately $4.9 million (approximately 6% of operating
revenues) in the year ended December 31, 1997.  The increase in
general and administrative expenses in 1997 was primarily
attributable to the increase in administrative personnel in the
Company's accounting, MIS and legal departments as well as
initiation of directors and officers insurance coverage in
February 1997.



<PAGE>




     Depreciation and amortization expenses include depreciation
and amortization of aircraft modifications, ground equipment and
leasehold improvements, but does not include any amortization of
start-up and route development costs as all of these costs are
expensed as incurred.  Depreciation and amortization expense
increased approximately 31% from approximately $1.6 million
(approximately 2% of operating revenues) in the year ended
December 31, 1996 to approximately $2.1 million (approximately 3%
of operating revenues) in the year ended December 31, 1997.  This
increase was primarily the result of improvements to new and
existing aircraft and gate space at the Kansas City Airport and
those costs associated with modifications to the Company's
reservation system.  In addition, the Company incurred a full
year of depreciation and amortization charged in the year ended
December 31, 1997 on property and equipment added in the year
ended December 31, 1996.

     Other income (expense), net consists primarily of debt
issuance cost amortization, interest income and interest expense.
In connection with the guarantees of the letter of credit issued
on behalf of its credit card processor and the bank line of
credit agreements, each executed in_1997 as discussed in Notes 6
and 8 of the audited financial statements of the Company, which
are included elsewhere herein, the Company issued certain
stockholders warrants to purchase shares of common stock at an
exercise price of $1.00 and $1.94 per share.  Accordingly, the
estimated fair value of the warrants issued related to the
agreements totaling $4,082,000 during the year ended December
31,1997 was recorded as deferred debt issuance costs and is being
amortized to expense over the terms of the related guarantees.
Interest expense increased during the year ended December 31,
1997, as a result of borrowings against the line of credit and
the addition of demand notes payable to related parties during
the year ended December 31, 1997.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995

     OPERATING REVENUES

     Total operating revenues increased approximately 90% from
approximately $36.2 million for the year ended December 31, 1995
to approximately $68.6 million for the year ended December 31,
1996.  This increase was primarily attributable to an increase in
the number of daily flights and the number of passengers on those
flights off-set by the drop in passenger yield per revenue
passenger mile.  At December 31, 1995, the Company operated 44
daily weekday flights with seven aircraft and during the year
then ended added service to Dallas/Fort Worth, Milwaukee,
Wichita, Des Moines, Minneapolis/St. Paul, Chicago-Midway and San
Francisco.  Service to Milwaukee terminated in March 1995.  At
December 31, 1996, the Company operated 63 daily flights with
eight aircraft, having added service to Los Angeles, Cincinnati,
Seattle, Phoenix, Atlanta, Fort Meyers, Las Vegas, Miami, Orlando
and Tampa during the year.  Service to Salt Lake City,
Cincinnati, Seattle and Phoenix terminated in November and
December of 1996.  Total available seat miles ("ASMs") increased
approximately 94%, from approximately 562 million during the year
ended December 31, 1995 to approximately 1,090 million during the
year ended December 31, 1996.  Revenue passenger miles ("RPMs")
increased approximately 130% from approximately 290 million
during the year ended December 31, 1995 to approximately 668
million during the year ended December 31, 1996.  The increase in
ASMs was primarily attributable to an increase in the number of
jet aircraft in service throughout the year, the number of daily
flights and the addition of destinations with greater flight
lengths.  The increase in RPMs was primarily attributable to an
increase in the number of daily flights, an increase in the
number of passengers on those flights and the addition of
destinations with greater flight lengths.  Load factor increased
from approximately 52% for the year ended December 31, 1995 to
approximately 61% for the year ended December 31, 1996.  This
increase was primarily the result of adjustments in capacity to
meet market demand, increases and changes in the number of city
pairs served, reduced fares, and an increase in market awareness
of the Company's service.



<PAGE>




     Passenger yield per RPM decreased approximately 17% from
approximately 11.74 for the year ended December 31, 1995 to
approximately 9.74 for the year ended December 31, 1996.  The
Company believes this decrease was partially attributable to the
Valujet and Trans World Airlines accidents in May 1996 and July
1996, respectively.  During the four-week period after each
accident, call volume at the Company's reservation center
declined substantially.  As a result, the Company's revenue/yield
management fare system offered customers seats at reduced fares.
In other words, the Company had to discount fares to stimulate
travel in existing markets during a seasonally strong sales
period.  The Company's favorable load factors remained unchanged,
but at the cost of reduced passenger yields.  The expansion of
service to new markets also contributed to the decrease in yield
experienced by the Company in 1996.  The Company also offered
promotional fares on its new city pairs throughout the year ended
December 31, 1996, and these new routes accounted for
approximately 48% of the systemwide RPMs during 1996.  The
Company terminated service in late 1996 to three cities in which
the Company had offered promotional fares.  During 1996, the
Company attempted to increase fares in mature markets in order to
improve passenger yield. The factors which decreased yield were
offset by the increase yield in the first half of 1996 as a
result of the absence of the ticket tax.  The benefit received by
the Company from the expiration of the ticket tax cannot
precisely be determined.  The ticket tax was reinstated in August
1996, the tax lapsed as of December 31, 1996, and Congress
reinstated the ticket tax as of March 7, 1997 with the tax
scheduled to lapse again on September 30, 1997.

     The Company also generates operating revenues as a result of
service charges from passengers who change flight reservations.
For a period of 180 days (90 days prior to March 24, 1997) after
the flight date, the customer may use the value of the unused
reservation for transportation, less a $50 ($25 through October
1996) service charge.  These operating revenues were
approximately $697,000 (approximately 2% of total operating
revenue) and approximately $2.1 million (approximately 3% of
total operating revenues) in the year ended December 31, 1995 and
the year ended December 31, 1996, respectively.

     OPERATING EXPENSES

     The following table sets forth the percentage of total
operating revenues represented by these expense categories as
well as certain other selected financial data.

                              YEAR ENDED DECEMBER 31,
                             1995                 1996

                    PERCENT OF  CENTS PER PERCENT OF CENTS PER
                    REVENUES       ASM     REVENUES    ASM

Total operating
  revenues               100.0%      6.43    100.0%    6.29
Operating expenses:
Flying operations         23.8%      1.53     25.2%    1.59
Aircraft fuel             20.0       1.29     23.3     1.47
Maintenance               17.8       1.15     23.4     1.48
Passenger service          8.0        .52     9.1       .57
Aircraft and
 traffic servicing        27.5       1.77     22.2     1.39
Promotion and sales       25.6       1.65     22.9     1.44
General and
 administration            7.6        .49     6.4       .40
Depreciation and
  amortization             3.0        .20     2.3       .15
Total operating
  expenses               133.3       8.60    134.8     8.49
Total other income
  (expense), net           (.4)       .00     (2.8)    (.17)
Net loss                 (33.7)%    (2.17)   (37.6%)    (2.37)



<PAGE>




     Flying operations expenses include aircraft lease and
subservice expense, compensation of pilots, expenses related to
flight dispatch and flight operations administration, hull
insurance and all other expenses related directly to the
operation of the aircraft other than aircraft fuel and
maintenance expenses.  Flying operations expenses increased
approximately 101% from approximately $8.6 million (approximately
24% of operating revenues) for the year ended December 31, 1995
to approximately $17.3 million (approximately 25% of operating
revenues) for the year ended December 31, 1996.  The number of
departures increased approximately 39% from 11,809 for the year
ended December 31, 1995 to 16,383 for the year ended December 31,
1996.  In addition, the Company leased three additional jet
aircraft in late 1995 and early 1996, two of which were newer,
more advanced Boeing 737-300 jet aircraft which have a larger
capacity and substantially higher lease and insurance costs.  In
connection with the acquisition of the three planes, the Company
hired 30 additional pilots and incurred additional pilot training
costs for existing and new pilots.

     Aircraft fuel expenses include the direct cost of fuel,
taxes and the costs of delivering fuel into the aircraft.
Aircraft fuel cost increased approximately 122% from
approximately $7.2 million (approximately 20% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.0 million (approximately 23% of operating revenues) for the
year ended December 31, 1996.  These fuel expenses represent an
increase in the fuel cost per ASM of 0.184 or 14% from 1.294 in
the year ended December 31, 1995 to 1.474 in the year ended
December 31, 1996 primarily due to an increase in fuel price.
Specifically, the average price increased from $0.61 per gallon
in the year ended December 31, 1995 to $0.79 per gallon in the
year ended December 31, 1996.  The Company's average cost per
gallon during the fourth quarter 1996 of $0.84 declined to $0.79
during the first quarter 1997.  Approximately one fourth of the
fuel price increase was due to a 4.304 per gallon federal excise
tax on domestic fuel consumption that began October 1, 1995.

     Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft.  Maintenance expenses increased approximately 150% from
approximately $6.4 million (approximately 18% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.1 million (23% of operating revenues) for the year ended
December 31, 1996.  This increase was primarily due to the
increase in the fleet size and block hours and cycles flown.  For
the year ended December 31, 1995, the average fleet size was
approximately 5.0 aircraft compared to an average fleet size for
the year ended December 31, 1996 of approximately 7.9 aircraft.
In late 1995 and early 1996, the Company leased two Boeing
737-300 jet aircraft, which generally are more costly with
respect to major scheduled maintenance.  In addition, the Company
incurred greater lease pool charges for the significant amount of
Boeing 737-300 jet aircraft parts held in stock.  During 1996,
the Company incurred charges related to certain Boeing 737-200
jet aircraft that were in excess of what traditionally had been
accrued by the Company for three scheduled maintenance checks.
The Company also charged approximately $300,000 to maintenance
expense in the fourth quarter for the early induction of three
aircraft for scheduled maintenance checks in November and
December 1996.  These scheduled maintenance checks were
originally scheduled during the first and second quarters of
1997.  This change in the Company's major maintenance schedule
corresponded to the major route restructuring completed by the
Company in December 1996.  The costs of routine aircraft and
engine maintenance are charged to maintenance expense as
incurred.  In addition, the Company accrues the cost of future
major scheduled maintenance on a monthly basis.  The Company
deposits funds with its aircraft lessors to cover a portion of
the cost of its future major scheduled maintenance.  Finally, the
Company significantly increased the capacity of its in-house
maintenance department during 1996.  The Company's maintenance
administration function expanded by eight employees to insure
compliance with all FAA and DOT regulations and requirements.
The Company also increased line maintenance personnel by twelve
employees including the introduction of maintenance operations at
Chicago-Midway and Minneapolis/St. Paul airports.



<PAGE>




     Passenger service expenses include flight attendant wages
and benefits, in-flight service, flight attendant training,
uniforms and overnight expenses and passenger liability
insurance.  Passenger service expenses increased approximately
116% from approximately $2.9 million (approximately 8% of
operating revenues) for the year ended December 31, 1995 to
approximately $6.2 million (approximately 9% of operating
revenues) for the year ended December 31, 1996.  This increase
was primarily due to the 39% increase in the number of departures
and the 62% increase in number of passengers carried.  Passenger
service expenses per ASM increased approximately 11% from
approximately 0.524 for the year ended December 31, 1995 to 0.574
for the year ended December 31, 1996.  This increase per ASM is
primarily due to passenger reaccomodation charges necessitated by
frequent schedule changes and restructurings in 1996 and
operational inefficiencies.

     Aircraft and traffic servicing expenses include all expenses
incurred at the airports for handling aircraft, passengers and
mail, landing fees, facilities rent, station labor and ground
handling expenses.  Aircraft and traffic servicing expenses
increased approximately 53% from approximately $10.0 million
(approximately 28% of operating revenues) in the year ended
December 31, 1995 to approximately $15.2 million (approximately
22% of operating revenues) in the year ended December 31, 1996.
This increase was primarily due to an increase in the number of
cities served and an increase in the number of departures.
Departures increased approximately 39% from 11,809 during the
year ended December 31, 1995 to 16,383 during the year ended
December 31, 1996, and the average cost per departure increased
approximately 10% from approximately $843 to approximately $927
in the same periods.  The increase in cost per departure was
primarily attributable to the additional cost associated with
providing service to airports with higher operating costs.  The
decrease in aircraft and traffic servicing as a percentage of
operating revenues was primarily attributable to station
personnel cost, landing fees and other traffic servicing costs
not rising in proportion to the increases in the number of
passengers and RPMs between 1995 and 1996.  The decrease of 0.384
per ASM was primarily due to a 42% increase in average stage
length from 372 miles in 1995 to 530 miles in 1996.

     Promotion and sales expenses include the costs of the
reservations function, including all wages and benefits for
reservationists, rent, electricity, communication charges, credit
card fees, travel agency commissions, advertising expenses and
wages and benefits for the marketing department.  Promotion and
sales expenses increased approximately 70% from approximately
$9.3 million (approximately 26% of operating revenues) in the
year ended December 31, 1995 to approximately $15.7 million
(approximately 23% of operating revenues) in the year ended
December 31, 1996.  This increase was primarily the result of an
increase in cities served, reflecting the Company's practice to
increase advertising when new cities are introduced in order to
create brand awareness while maintaining stable advertising
programs in existing cities.  In addition, the Company's
reservation operations expanded in May 1996 with the opening of a
new reservation center in Lawrence, Kansas.  The average
promotion and sales cost per passenger increased from $11.88 in
the year ended December 31, 1995 to $12.47 in the year ended
December 31, 1996.

     General and administrative expenses include the wages and
benefits for the Company's executive and various other
administrative personnel, the costs for office supplies, office
rent, legal, accounting and other miscellaneous expenses.
General and administrative expenses increased approximately 58%
from $2.8 million (approximately 8% of operating revenues) in the
year ended December 31, 1995 to $4.4 million (approximately 6% of
operating revenues) in the year ended December 31, 1996.  The
decrease in general and administrative expenses as a percentage
of operating revenues and on a per ASM basis was primarily
attributable to increased productivity and economies of scale.

     Depreciation and amortization expenses include depreciation
and amortization of aircraft modifications, ground equipment and
leasehold improvements, but does not include any amortization of
start-up and route development costs as all of these costs are
expensed as incurred.  Depreciation and amortization expense
increased approximately 46% from approximately $1.1 million
(approximately 3% of <PAGE> operating revenues) in the year ended
December 31, 1995 to approximately $1.6 million (approximately 2%
of operating revenues) in the year ended December 31, 1996.  This
increase was primarily a result of improvements to new and
existing aircraft and costs associated with modifications of the
Company's reservation system as well a full year of depreciation
and amortization charged in 1996 on 1995 additions.

     Other income (expense), net consists primarily of debt
issuance cost amortization, interest income and interest expense.
In connection with a guarantee of a bank line of credit executed
in July 1996, the Company issued certain stockholders (the
guarantors) warrants to purchase an aggregate of up to 656,250
shares of common stock at a weighted-average exercise price of
$6.65 per share.  Accordingly, the estimated fair value of the
warrants issued of $1,850,000 was recorded in other current
assets as deferred debt issuance costs and was amortized to
expense over the term of the line which expired January 1997.
Interest income increased during the year ended December 31,
1996, as a result of greater average interest bearing cash
balances compared to 1995.  Interest expense decreased during the
year ended December 31, 1996, as a result of lower average
borrowings during the year as compared to 1995.




<PAGE>




LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has financed its operations and
met its capital expenditure requirements primarily with proceeds
from private sales of equity securities, proceeds from its initial
public offering of Common Stock, proceeds from its public Rights
Offering and the issuance of debt mostly to its principal
stockholders.  As of March 20, 1998, the Company has received net
proceeds from the sale of its equity securities in the aggregate
amount of approximately $54.7 million.  In addition, the Company
has utilized current liabilities as an additional source of cash by
delaying payments to certain of its creditors.  Most of the
Company's suppliers currently provide goods, services and operating
equipment on open credit terms.  If such terms were modified to
require cash prepayment, the Company's cash position and possibly
its ability to continue to operate would be materially and
adversely affected.

     On January 30, 1998, the Company borrowed $1.9 million under
a credit agreement that expires on January 30, 1999 with INTRUST
Bank, N.A. (Wichita, KS).  The Company used the proceeds to repay
the amount outstanding under the Commerce Bank, N.A. line of credit
that matured on January 30, 1998.  The line of credit is guaranteed
by certain stockholders.  In consideration for the guarantees, the
Company granted the guarantors warrants to purchase shares of the
Company's Common Stock. There can be no assurance that a
replacement $1.9_million line of credit will be available on
acceptable terms, if at all, prior to its maturity.  In the event
that the Company is unable to replace or extend the line of credit
prior to January_30, 1999, the Company would be required to utilize
available cash balances, which would materially adversely affect
the Company's then current cash position.  There can be no
assurance that the Company will have adequate cash resources to pay
down the line of credit.

     On January 17, 1997, a principal stockholder of the Company
agreed to establish a two-year $4.0 million letter of credit on
behalf of the Company in favor of the Company's credit card
processor in order to reduce required restricted cash balances with
such processor.  On May 7, 1997 the same principal stockholder of
the Company agreed to establish a two-year $2.0 million guarantee
on behalf of the Company in favor of the Company's credit card
processor in order to further reduce required restricted cash
balances with such processor to secure its increased exposure due
to increased advance ticket sales.  In consideration for these
agreements, the Company agreed to issue warrants to purchase up to
5,030,928 shares of the Company's Common Stock.  The Company
anticipates increased requirements with respect to restricted cash
balances and there can be no assurance that the Company's principal
stockholder will increase the letter of credit or guarantee or that
the Company's use of cash from operations to secure the credit card
processor will not have a material adverse effect on the Company's
liquidity.

     In April 1997, the Company completed a private sale of units
of securities, each unit consisting of one share of Common Stock
and two redeemable common stock purchase warrants.  In connection
with the sale, the Company issued 5,150,000 shares of its Common
Stock for net proceeds of approximately $10.2 million.  Included in
this private sale were 5,000,000 shares of Common Stock issued to
certain principal stockholders in lieu of repayment of $10.0
million of notes payable to the stockholders in conjunction with
this offering.

     In December 1997, the Company completed a sale of 30,455,714
shares of Common Stock through a Rights Offering.  Under the Rights
Offering, the Company distributed nontransferable rights, at no
cost, to stockholders of record.  Each record holder received two
rights, with each right entitling the holder to purchase one share
of Common Stock for a price of $0.50 per share.  Certain principal
stockholders exercised all of their rights pursuant to the basic
subscription and the oversubscription privileges of the Rights
Offering.  In lieu of paying the subscription price in cash, they
relieved and discharged the Company of approximately $12.2 million
notes payable to principal stockholders.  The net cash proceeds to
the Company from the sale of its Common Stock upon the exercise of
the rights offered totaled approximately $3.0 million.



<PAGE>




     On March 20, 1998, the Company closed on a private sale of
equity securities, each unit costing $10 and consisting of one
share of Series A Convertible Preferred Stock, par value $.001, and
one common stock purchase warrant (each a "Preferred Unit").  In
connection with the sale, the Company converted approximately $3.0
million of bridge financing notes and interest.  Each warrant
entitles the holder to purchase, at any time over a seven-year
period commencing six months after the closing, 40 shares of Common
Stock at an exercise price of $0.55 per share of Common Stock.  In
addition, under the same agreement, the Company has the option to
sell additional 150,000 Preferred Units under the same terms and
conditions, provided the sale occurs not later than 90 days from
March 20, 1998.  The Company has not determined whether to sell
additional Preferred Units.

     During the period from January 1, 1997 through March 20, 1998,
the Company borrowed an aggregate $30.6 million from the principal
stockholders of the Company in the form of unsecured demand notes
payable (collectively, the "Notes"). The Notes accrue interest at
8.0% to 9.0%. During 1997, approximately $22.2 million of notes
payable to stockholders was converted to Common Stock in
conjunction with the sales of certain equity securities completed
in 1997.  On March 20, 1998, the Company entered into a Note
Exchange Agreement whereby the principal stockholders holding the
notes agreed to exchange their remaining unsecured demand notes
payable totaling approximately $9.5 million, and all accrued unpaid
interest, for new unsecured convertible demand notes payable (the
"Convertible Notes").  The Convertible Notes are automatically
convertible at such time as the Company has an adequate number of
authorized shares available for issuance.  There can be no
assurance that the Company's principal stockholders will continue
to provide cash through the issuance of unsecured demand notes
payable, or otherwise.

     During the year ended December 31, 1997, the Company did not
generate sufficient passenger ticket sales to provide for its
operational cash needs.  During the year ended December 31, 1997,
the Company's operating activities resulted in a cash flow deficit
of $26.4 million.  This cash flow deficit has been funded primarily
through the sale of equity securities and debt borrowings from its
principal stockholders, as discussed above.  At December 31, 1997,
the Company had cash and cash equivalents of approximately $1.1
million.  The Company had a working capital deficit at December 31,
1997 of approximately $22.4 million.  The Company's working capital
deficit is expected to be reduced by approximately $10.4 million in
connection with the conversion of demand notes and associated
interest in May 1998. These factors raise substantial doubt about
the Company's ability to continue as a going concern.  Further, the
financial statements presented elsewhere herein and the financial
information presented herein were prepared assuming the Company
will continue as a going concern and, as such, do not include any
adjustments that might result from the outcome of this uncertainty.

     The Company estimates that major scheduled maintenance of its
existing aircraft fleet through December 1998 will cost
approximately $7.5 million, of which $4.4 million will be funded
from existing supplemental rent payments recoverable from aircraft
lessors.  The Company must modify one of its existing aircraft to
satisfy the December 31, 1998 Stage 3 noise requirements.  The
Company believes that through modification of current lease terms,
the acquisition of a FAA certified hush kit would be available to
allow the Company's fleet to meet Stage 3 noise requirements by
December 31, 1998.  If the Company is unable to renegotiate one of
its leases it would be required to a acquire a hush kit at a cost
of approximately $1.4 million. The Company expects to expend
approximately $1.8 million on various capital expenditures
primarily related to improvements to existing aircraft and
improvements to its in-house computer resources.  As of December
31, 1997, the Company has entered into a letter of intent to lease
one additional Boeing 737-200 aircraft and anticipates
approximately $360,000 of deposit requirements.

     The Company does not anticipate generating sufficient cash
flow from operations until the second quarter of 1998. The Company
plans to implement certain actions designed to achieve long-term
profitability.  Management's plans to achieve long-term
profitability include the reduction of frequency in certain under
performing routes, the introduction of new markets in December
1997, participation in the SABRE CRS and anticipated participation
in the Worldspan CRS, increased focus on the price-sensitive
business traveler and pricing strategies designed to maximize
passenger revenue, passenger yield and cost controls.  There can be
no assurance that their efforts will be successful.



<PAGE>




     Whether or not the Company's strategic plans to achieve
long-term profitability are successful, the Company's continued
operations are dependent upon the additional financing.  Management
plans to raise additional capital and secure additional bank
financing to fund continued operations.  The Company can raise
approximately $1.5 million more through the sale of additional
Preferred Units, as described above.  Failure to raise additional
funds in the future could result in the Company significantly
curtailing or ceasing operations.  The Company's ability to raise
additional cash through equity or debt financings that may be
required to continue operations during 1998 will likely be
dependent upon the Company's success in implementing actions
designed to achieve long-term profitability, as described above,
and its ability to operate at profitable levels during the second
and third quarters of 1998, as to which there can be no assurance.
There can be no assurance that management can provide for the
Company's necessary capital requirements or that the principal
stockholders will continue to provide cash through the issuance of
unsecured demand notes payable, or otherwise.

OTHER MATTERS

YEAR 2000 COMPLIANCE

     Management has begun the process to modify the Company's
information technology to recognize the year 2000 and has begun
converting critical data process systems.  The Company's new
reservations software installed in the third quarter of 1997 is
Year 2000 compliant.  In addition, the Company purchased a new
revenue management system in February 1998 that is year 2000
compliant.  The Company believes these two systems are critical
data processing systems.

     Vanguard has not yet completed its assessment of the impact
of the Year 2000 on operational systems such as aircraft
avionics, accounting and airport operations as well as
relationships with key business partners, including the FAA,
other governmental agencies and suppliers.  The Company will need
to address issues related to key business partners that are
common to other air carriers.  As a result, the Company cannot
estimate what the total cost will be to implement the required
efforts for all critical data processing systems.

     While the Company believes it is taking all appropriate
steps to assure Year 2000 compliance, it is dependent on key
business and governmental partners compliance to some extent.
The Year 2000 problem is pervasive and complex as virtually every
computer operation will be affected in some way.  Consequently,
no assurance can be given that Year 2000 compliance can be
achieved without a material cost.  The Company will continue to
implement systems with strategic value though some projects may
be delayed due to resource constraints.

NEW ACCOUNTING STANDARDS

     Recent pronouncements of the FASB, which are not required to
be adopted until 1998, include SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130") and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS
131").  SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of
general purpose financial statements.  The statement requires
that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements.  The Company expects
the affects of the adoption of SFAS 130 to be immaterial on the
Company's financial statements.  Applicability of SFAS 130 will
not impact amounts previously reported for net income.

     SFAS 131 supersedes SFAS No. 14 and establishes new
standards for the way that public companies report selected
information about operating segments in annual financial
statements and requires that those companies report selected
information about segments in interim financial reports issued to
shareholders.  It <PAGE> also establishes standards for related
disclosures about products and services, geographic areas and
major customers.  The Company does not believe the adoption will
have a material effect on the Company's financial statements.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Reference is made to the financial statements and schedules
and Report of Independent Auditors included later in this report
under Item 14.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE.

     None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Election of Directors" certain
information required by Item 10 of Form 10-K and such information
is incorporated herein by this reference.  The information
required by Item 10 of Form 10-K as to executive officers is set
forth in Item 4A of Part I hereof.

     The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" certain information required
by Item 10 of Form 10-K and such information is incorporated
herein by this reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Executive Compensation" the
information required by Item 11 of Form 10-K and such information
is incorporated herein by this reference (except that the
information set forth under the following subcaptions is
expressly excluded from such incorporation:  "Executive
Compensation and Stock Option Committee Report" and "Company
Performance").

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

     The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Voting Securities and Principal
Holders Thereof" the information required by Item 12 of Form 10-K
and such information is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Certain Transactions" the
information required by Item 13 of Form 10-K and such information
is incorporated herein by this reference.



<PAGE>




PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND
          REPORTS ON FORM 8-K

     (a)  Financial Statements.

     (1)  Audited Financial Statements:

     Report of Independent Auditors                            38

     Balance Sheets -
     December 31, 1997 and December 31, 1996                   39

     Statements of Operations for the years ended
     December 31, 1997, 1996 and 1995                          41

     Statements of Stockholders' Equity (Deficit) for the
     years ended December 31, 1997, 1996 and 1995              42

     Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995                          43

     Notes to Financial Statements                             45

     (2)  The following financial statement schedule is included
herein:

     Schedule II - Valuation and Qualifying Accounts           67

All other schedules are omitted, as the required information is
inapplicable or the information is presented in the financial
statements or related notes.

     (3)  The exhibits required to be filed by this item are set
forth in paragraph (c) below:

     (b)  Reports on Form 8-K.

          On January 15, 1998, the Company filed a report on Form
          8-K under Item 5-Other Events regarding a press release
          issued by the Company on January 13, 1998 announcing
          the resignation of Edmund H. Shea, Jr. from the
          Company's Board of Directors.  This item was reported
          under Item 5 of Form 8-K rather than Item 6 because Mr.
          Shea's resignation was not the result of a disagreement
          with the Registrant on any matter relating to
          Registrant's operations, policies or practices.

      (c) Exhibits.

     3.1  Restated Certificate of Incorporation, as amended of
          Registrant (filed as Exhibit 3.1 to the Registrants
          Form 10-K for the year ended December 31, 1996 and
          incorporated herein by reference).



<PAGE>




     3.2  Certificate of Designation of Series A Preferred Stock
          of Registrant, as filed with Delaware Secretary of
          State on March 18, 1998

     3.3  By laws of Registrant, as amended to date (filed as
          Exhibit 3.2 to Amendment No. 2 to the Registrant's
          Registration Statement No. 33-96884 and incorporated
          herein by reference).

     10.1 Registrant's 1994 Stock Option Plan, as amended to date
          (filed as Exhibit 10.1 to the Registrant's Registration
          Statement No. 33-96884 and incorporated herein by
          reference).

     10.2 Form of Incentive Stock Option Agreement (filed as
          Exhibit 10.2 to the Registrant's Registration Statement
          No. 33-96884 and incorporated herein by reference).

     10.3 Form of Nonstatutory Stock Option Agreement (filed as
          Exhibit 10.3 to the Registrant's Registration Statement
          No. 33-96884 and incorporated herein by reference).

     10.4 Form of Employee Stock Purchase Plan (filed as Exhibit
          10.4 to the Registrant's Registration Statement No.
          33-96884 and incorporated herein by reference).

     10.5 Registrant's 401(k) Plan (filed as Exhibit 10.4 to the
          Registrant's Registration Statement No. 33-96884 and
          incorporated herein by reference).

     10.6 Form of Registrant's Profit Sharing Plan (filed as
          Exhibit 10.6 to the Registrant's Registration Statement
          No. 33-96884 and incorporated herein by reference).

     10.7 Aircraft Lease Agreement, dated as of December 8, 1994,
          between US Air, Inc. and Registrant, along with Lease
          Supplements Nos. 1, 2, 3 and 4 (filed as Exhibit 10.7
          to the Registrant's Registration Statement No. 33-96884
          and incorporated herein by reference).

     10.8 Supplementary Lease Agreement, dated as of October 28,
          1997, between US Air,    Inc. and Registrant (filed as
          Exhibit 10.8 to the Registrant's Registration Statement
          No. 33-96884 and incorporated herein by reference).

     10.9 Modification to Aircraft Lease Agreement, dated
          September 1, 1995, between U.S. Air, Inc. and
          Registrant (filed as Exhibit 10.9 to the Registrant's
          Registration Statement No. 33-96884 and incorporated
          herein by reference).

   10.10  Acknowledgment and Consent of the Registrant regarding
          assignment of Aircraft Lease Agreement between US Air,
          Inc. and Registrant (filed as Exhibit 10.10 to the
          Registrant's Form 10-K for the year ended December 31,
          1996 and incorporated herein by reference).

  10.11   Amendment No. 1 to Lease Agreement, by and between
          Registrant and First Security Bank as owner, trustee
          and successor-in-interest to U.S. Airways, Inc. (f/k/a
          U.S. Air, Inc.) (filed as Exhibit 10. 1 to Registrants
          Form 10-Q for the Quarterly Period Ended June 30,
          1997).



<PAGE>




  10.12   Aircraft Lease Agreement, dated as of December 6, 1994,
          between EA 727, Inc. and Registrant (filed as Exhibit
          10.10 to the Registrant's Registration Statement No.
          33-96884 and incorporated herein by reference).

  10.13   Aircraft Lease Agreement, dated December 11, 1995,
          between the Registrant and Mimi Leasing Corporation
          (filed as Exhibit 10.30 to the Registrant's Form 10-K
          for the year ended December 31, 1995).

  10.14   Aircraft Lease Agreement, dated as of May 30, 1997,
          between Interlease Aviation Investors III (TACA),
          L.L.C. and the Registrant (filed as Exhibit 10.14 to
          the Registrant's Form 10-Q for the Quarterly Period
          Ended June 30, 1997 and incorporated herein by
          reference).

 10.15    Aircraft Lease Agreement, dated September 18, 1997,
          between Interlease Aviation Investors II (Aloha),
          L.L.C. and the Registrant (filed as Exhibit 10.1 to the
          Registrant's Form 10-Q for the quarterly period ended
          September 30, 1997 and incorporated herein by
          reference).

 10.16    Aircraft Lease Agreement, dated November 18, 1997
          between Mimi Leasing Corporation and the Registrant

 10.17    Employment Agreement, dated November 3, 1997 between
          the Registrant and Robert J. Spane

 10.18    Registration Rights Agreement, dated as of March 20,
          1998

 10.19    Unit Purchase Agreement, dated as of March 20, 1998,
          between the Registrant and J. F. Shea Co., Inc. and The
          Hambrecht 1980 Revocable Trust

 10.20    Note Exchange Agreement, dated as of March 20, 1998,
          between the Registrant and the Holders

 10.21    Computer Software Nonexclusive License Agreement, dated
          as of September 14, 1994, between Morris Air
          Corporation and the Registrant (filed as Exhibit 10.11
          to the Registrant's Registration Statement No. 33-96884
          and incorporated herein by reference).

 10.22    Lease, dated September 27, 1994, between the Gerson
          Company and Registrant, as amended to date (Mission, KS
          Corporate/Reservations Office) (filed as Exhibit 10.13
          to the Registrant's Registration Statement No. 33-96884
          and incorporated herein by reference).

 10.23    Shopping Center Lease, dated February 28, 1996, between
          the Registrant and Southern Hills Center, L.L.C.
          (Lawrence, KS Office) (filed as Exhibit 10.31 to the
          Registrant's Form 10-K for the year ended December 31,
          1995).

  10.24   Second Amendment and Restated Warrant Purchase
          Agreement among Registrant and certain of its
          stockholders (filed as Exhibit 10.18 to the
          Registrant's Registration Statement No. 33-96884 and
          incorporated herein by reference).



<PAGE>




  10.25   Form of Amended and Restated Warrant for the Purchase
          of Shares of Series B Preferred Stock (Amended Warrant)
          (filed as Exhibit 10.19 to the Registrant's
          Registration Statement No. 33-96884 and incorporated
          herein by reference).

  10.26   Reimbursement Agreement, dated as of December 31, 1996,
          by and among Registrant and Hambrecht & Quist
          California, a wholly owned subsidiary of Hambrecht &
          Quist Group (filed as Exhibit 10.21 to the Registrants
          Form 10-K for the year ended December 31, 1996 and
          incorporated herein by reference).

  10.27   Security Agreement, dated as of December 31, 1996, by
          Registrant in favor of Hambrecht & Quist California
          (filed as Exhibit 10.22 to the Registrants Form 10-K
          for the year ended December 31, 1996 and incorporated
          herein by reference).

  10.28   Amended and Restated Reimbursement Loan Note in the
          amount of $4,000,000 (filed as Exhibit 10.23 to the
          Registrants Form 10-K for the year ended December 31,
          1996 and incorporated herein by reference).

  10.29   Warrant for the purchase of shares of Common Stock
          issued to Hambrecht & Quist California (filed as
          Exhibit 10.24 to the Registrants Form 10-K for the year
          ended December 31, 1996 and incorporated herein by
          reference).

  10.30   Merchant Agreement, dated as of February 27, 1997, by
          and between Registrant and Michigan National Bank
          (filed as Exhibit 10.25 to the Registrants Form 10-K
          for the year ended December 31, 1996 and incorporated
          herein by reference).

  10.31   Amendment to Merchant Agreement, dated as of February
          6, 1997, by and between Registrant (filed as Exhibit
          10.26 to the Registrants Form 10-K for the year ended
          December 31, 1996 and incorporated herein by
          reference).

  10.32   Promissory Note in the amount of $1,900,000 to Intrust
          Bank, N.A., dated January 30, 1998

  10.33   Warrant Purchase Agreement, dated as of January 30,
          1997 (filed as Exhibit 10.29 to the Registrants Form
          10-K for the year ended December 31, 1996 and
          incorporated herein by reference).

  10.34   Form of Warrant to purchase shares of Common Stock in
          connection with the Commerce Bank Line of Credit (filed
          as Exhibit 10.30 to the Registrants Form 10-K for the
          year ended December 31, 1996 and incorporated herein by
          reference).

  21.1    List of Subsidiaries of Registrant (filed as Exhibit
          21.1 to the Registrant's Registration Statement No.
          33-96884 and incorporated herein by reference).

  23.1    Consent of Ernst & Young LLP.

  24.1    Power of Attorney (included on the signature page of
          this Form 10-K)

   27     Financial Data Schedule.



<PAGE>




  (d)     Financial Statement Schedules.

     The response to this portion of Item 14 is submitted as a
separate section of this report.

<PAGE>


                  Report of Independent Auditors

The Board of Directors and Stockholders
Vanguard Airlines, Inc.

We have audited the accompanying balance sheets of Vanguard
Airlines, Inc. (the Company) as of December 31, 1997 and 1996,
and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the
period ended December 31, 1997. Our audits also included the
financial statement schedule listed on the Index at Item 14(a).
These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on
our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Vanguard Airlines, Inc. as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.  Also in our opinion,
the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has recurring
operating losses and a working capital deficiency. In
addition, the Company has an accumulated deficit and net capital
deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 2. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Ernst & Young LLP
Kansas City, Missouri
February 27, 1998
except for Notes 2 and 12
as to which the date
is March 20, 1998


<PAGE>




Vanguard Airlines, Inc.
Balance Sheets


                                          December 31
                                       1997          1996

Assets
Current assets:
Cash and cash equivalents             $ 1,082,712   $   402,083
Restricted cash                              -        1,822,998
Accounts receivable, less
 allowance for doubtful
 accounts of $354,000 in
 1997 ($230,000 in 1996)
                                        2,312,439     3,454,418
Inventories                               842,620       673,338
Prepaid expenses and other
 current assets                         1,011,417       867,104
Current portion of supplemental
 maintenance deposits                   4,546,824     2,489,270
Total current assets                    9,796,012     9,709,211

Property and equipment, at cost:
Aircraft improvements and
 leasehold costs                        4,611,528     3,731,046
Reservation system and
 communication equipment                1,844,981     1,516,440
Other property and equipment            3,695,943     2,404,121
                                       10,152,452     7,651,607
Less accumulated depreciation
 and amortization                      (4,667,768)   (2,601,949)
                                        5,484,684     5,049,658

Other assets:
Supplemental maintenance deposits,
   less current portion                 3,221,875     2,233,988
Deferred debt issuance costs            2,223,233          --
Leased aircraft deposits                2,258,500     1,506,000
Fuel and security deposits              1,240,284     1,093,185
Other                                     539,296       726,205
                                        9,483,188     5,559,378


Total assets                          $24,763,884   $20,318,247



<PAGE>




                                              December 31
                                          1997         1996

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:

Notes payable to related parties      $  9,467,741  $ 2,500,000
Accounts payable                         6,095,903    8,404,196
Accrued expenses                         4,007,363    3,652,162
Accrued maintenance                      6,588,830    4,684,550
Air traffic liability                    5,989,085    6,609,609
Current portion of capital
 lease obligations                           --         155,575
Total current liabilities               32,148,922   26,006,092

Line of credit                           1,900,000    5,000,000
Accrued maintenance, less
 current portion                         2,659,396    2,547,088
Capital lease obligations,
 less current portion                       --            3,084

Commitments and contingencies

Stockholders' deficit:
Preferred stock, $.001 par value:
Authorized shares   1,000,000
Issued and outstanding shares   none         --           --
Common stock, $.001 par value:
Authorized shares   50,000,000 in
 1997 (15,000,000 in 1996)
Issued and outstanding shares
 45,695,908 in 1997 (9,982,452
 in 1996)                                  45,696        9,982
Additional paid-in capital             57,753,488   28,283,996
Accumulated deficit                   (69,692,060)  (41,446,057)
                                      (11,892,876)  (13,152,079)
Deferred stock compensation               (51,558)      (85,938)
Total stockholders' deficit           (11,944,434)  (13,238,017)
Total liabilities and
 stockholders' deficit                $24,763,884   $20,318,247



See accompanying notes.


<PAGE>




Vanguard Airlines, Inc.
Statements of Operations

                                 Year ended December 31
                             1997           1996        1995
Operating revenues:
Passenger revenue        $ 76,560,373 $ 64,977,645  $ 33,980,209
Other                       4,823,765    3,611,456     2,178,809
Total operating
 revenues                  81,384,138   68,589,101    36,159,018

Operating expenses:
Flying operations         17,080,316    17,306,500     8,615,286
Aircraft fuel             18,571,472    16,005,041     7,223,040
Maintenance               19,334,251    16,074,921     6,440,702
Passenger service          7,342,237     6,245,678     2,894,113
Aircraft and traffic
 servicing                16,746,727    15,193,426     9,950,014
Promotion and sales       20,701,511    15,722,822     9,253,974
General and
 administrative            4,914,469     4,371,150     2,764,313
Depreciation and
 amortization              2,067,917     1,583,879     1,083,871
Total operating
 expenses                106,758,900    92,503,417    48,225,313

Operating loss           (25,374,762)  (23,914,316) (12,066,295)

Other income (expense):
Deferred debt issuance
 cost amortization        (1,858,767)   (1,833,335)      --
Interest expense          (1,110,465)    (195,728)     (217,603)
Interest income               97,991       135,309       88,368
Total other expense, net  (2,871,241)  (1,893,754)     (129,235)
Net loss                 $(28,246,003)$(25,808,070) $(12,195,530)

Net loss per share       $     (1.85) $     (2.85)  $     (1.65)

Weighted-average common
shares outstanding         15,232,901    9,056,888      7,395,921



See accompanying notes.



<PAGE>

<TABLE>

Vanguard Airlines, Inc.

Statements of Stockholders' Equity (Deficit)

<CAPTION>                                                                                                   Total
                   Convertible Preferred Stock  Common Stock    Additional                   Deferred   Stockholders'
                    Series A       Series B                       Paid-In    Accumulated       Stock         Equity
               Shares   Amount Shares   Amount Shares   Amount    Capital     Deficit      Compensation    (Deficit)

<S>          <C>       <C>    <C>        <C>    <C>       <C>    <C>          <C>          <C>           <C>
Balance at
December
31, 1994     2,000,000 $2,000 3,641,043  $3,641 433,333   $  433  $ 6,012,406 $ (3,442,457)    $     --  $   2,576,023

Issuance
of warrants      --       --      --        --     --        --        71,000        --           --            71,000
Issuance of
compensatory
options          --       --      --        --     --        --       250,000        --      (250,000)         --

Amortization of
deferred stock
compensation     --       --      --         --    --         --       --            --       122,159         122,159

Conversion of
preferred stock
to common
stock     (2,000,000)   (2,000)(3,641,043) (3,641) 5,641,043  5,641    --            --         --             --

Issuance of
common stock
in public
offering         --        --      --        --    2,400,000   2,400 12,953,581         --          --    12,955,981

Exercise of
stock options    --        --      --        --       50,000      50   14,950           --         --        15,000

Net loss         --        --      --        --         --        --       --     (12,195,530)       --    (12,195,530)

Balance at
December 31,
1995             --         --     --        --    8,524,376    8,5241 9,301,937  (15,637,987)   (127,841)   3,544,633

Issuance of
warrants         --          --     --       --     --          --     1,850,000        --       --          1,850,000

Amortization
of deferred
stock
compensation     --          --     --        --      --          --          --          --    41,903           41,903

Issuance of
common stock
and warrants
in a private
placement        --          --      --       --   1,319,774     1,320      7,114,188     --       --        7,115,508

Exercise of
stock options    --         --       --        --    138,302       138         17,871     --       --          18,009

Net loss         --          --      --        --      --          --            --  (25,808,070)  --     (25,808,070)

Balance at
December 31,
1996             --          --      --        --   9,982,452     9,982   28,283,996 (41,446,057) (85,938)  (13,238,017)

Issuance of
warrants         --          --      --         --     --         --       4,082,000      --       --        4,082,000
Amortization
of deferred
stock
compensation     --          --      --         --     --         --         --           --   34,380          34,380

Issuance of
common stock in
a private
placement        --          --      --         --    5,150,000 5,150   10,229,850       --     --        10,235,000

Issuance of
common stock
in a rights
offering         --          --       --          -- 30,455,714 30,456    15,144,544        --     --     15,175,000

Exercise of
stock options    --          --       --         --    107,742    108       13,098         --     --         13,206

Net loss         --          --         --       --        --     --          --     (28,246,003)   --    (28,246,003)

Balance at
December 31,
1997             --    $     --         --    $   -- 45,695,908 $45,696 $57,753,488 $(69,692,060) $ (51,558) $(11,944,434)

See accompanying notes.

<TABLE\>
<PAGE>



Vanguard Airlines, Inc.
Statements of Cash Flows

                               Year ended December 31
                           1997           1996        1995

OPERATING ACTIVITIES
Net loss             $(28,246,003)  $(25,808,070)  $(12,195,530)
Adjustments to
 reconcile net
 loss to net cash
 used in operating
 activities:
Depreciation              848,948        681,982       345,067
Amortization            1,218,969        901,897       738,804
Loss on sale and
 disposal of
 property and
 equipment                 11,400        117,954          --
Deferred debt issuance
 cost amortization      1,858,767      1,850,000        71,000
Compensation related
 to stock options          34,380         41,903       122,159
Provision for
 uncollectible
 accounts                 253,276         32,719       197,000

Changes in operating
 assets and liabilities:
Restricted cash         1,822,998     (1,822,998)         --
Accounts receivable       888,703     (2,215,892)   (1,128,214)
Inventories              (169,282)      (335,219)     (331,110)
Prepaid expenses and
 other current
 assets                  (144,313)       635,008      (780,133)
Supplemental maintenance
 deposits              (3,045,441)    (1,793,220)   (2,930,038)
Accounts payable       (2,308,293)     5,937,339     3,395,860
Accrued expenses          355,201      1,348,785       904,818
Accrued maintenance     1,563,588      2,503,081     2,872,983
Air traffic
 liability               (620,524)     4,348,888     1,482,684
Deposits and other       (712,690)      (983,664)     (935,007)
Net cash used in
 operating
 activities           (26,390,316)   (14,559,507)   (8,169,657)

INVESTING ACTIVITIES
Purchases of property
 and equipment         (2,061,343)    (2,958,406)    (2,341,478)

FINANCING ACTIVITIES
Proceeds from issuance
 of notes payable
 to related parties     29,148,816      3,900,000          --
Proceeds from line of
 credit borrowings      2,275,000      9,700,000       2,000,000
Principal payments
 on line of credit     (5,375,000)    (4,700,000)    (2,000,000)
Principal payments on
 notes payable to
 related parties            --         (1,400,000)         --
Proceeds from sale of
 common stock and the
 exercise of stock
 options, net of
 offering costs          3,242,131      7,133,517    12,970,981
Principal payments on
 notes payable and
 capital lease
 obligations             (158,659)       (205,161)     (95,015)
Net cash provided
 by financing
 activities            29,132,288      14,428,356    12,875,966



<PAGE>


Vanguard Airlines, Inc.
Statements of Cash Flows (continued)

                                    Year ended December 31
                          1997          1996           1995

Net increase (decrease)
 in cash and cash
 equivalents         $   680,629    $ (3,089,557)  $  2,364,831
Cash and cash
 equivalents at
 beginning of year       402,083       3,491,640      1,126,809
Cash and cash
 equivalents at
 end of year         $ 1,082,712    $    402,083   $  3,491,640

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during
 the period for
 interest            $   377,122    $    159,541   $    146,603

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES

Conversion of
 related-party
 notes payable to
 common stock        $ 22,181,075   $       --     $        --
Deferred debt
 issuance costs
 recorded in
 conjunction with
 warrants issued     $ 4,082,000    $  1,850,000   $    71,000
Aircraft leasehold
 costs associated
 with accrued
 maintenance at
 inception of lease  $  453,000     $     --       $   620,052
Property and
 equipment accrued
 through issuance
 of capital lease
 obligations         $     --       $   134,031    $    84,267
Aircraft improvements
 financed through the
 issuance of notes
 payable             $     --       $ 1,000,000    $      --
Retirement of notes
 payable through sale
 of property and
 equipment           $      --      $   958,333    $      --
Reduction of accounts
 payable through
 sale of property
 and equipment       $       --     $   933,431    $      --
Conversion of
 preferred stock to
 common stock        $       --     $      --      $   6,005,147
Deferred compensation
 costs associated
 with issuance of
 compensatory stock
 options             $       --     $      --      $   250,000
See accompanying notes.



<PAGE>


1.   SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Vanguard Airlines, Inc. (the Company) was incorporated in
Delaware in April 1994. The Company offers low-fare, convenient,
short- to medium-haul passenger air transportation service
primarily in the midwestern, Rocky Mountain, northeastern and
southeastern regions of the United States and commenced flight
operations on December 4, 1994.

The airline industry is highly competitive primarily due to the
effects of the Airline Deregulation Act of 1978, which has
substantially eliminated government authority to regulate
domestic routes and fares and has increased the ability of
airlines to compete with respect to flight frequencies and fares.

The airline industry is significantly affected by general
economic conditions. Because a substantial portion of business
and personal airline travel is discretionary, the industry
has experienced adverse financial results during general economic
downturns and positive financial results during economic upturns.
The Company's business is also seasonal, which can affect the
Company's results of operations from quarter to quarter.

Fuel is a major component of operating expenses for all airlines.
Both the cost and availability of fuel are subject to many
economic and political factors and events occurring throughout
the world. The future cost and availability of fuel to the
Company cannot be predicted, and substantial sustained price
increases or the inability to obtain adequate fuel supplies could
have a material adverse effect on the Company's operations and
profitability.

USE OF ESTIMATES

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.


<PAGE>

1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RESTRICTED CASH

Restricted cash includes cash equivalents that secure the risk of
loss exposure estimated by the Company's credit card processor.
At December 31, 1997, the restricted cash balance totaling
$217,396 is considered noncurrent and is included as a component
of other assets on the accompanying balance sheet. The
significant reduction in restricted cash balance from December
31, 1996 is attributable to certain of the Company's stockholders
providing guarantees of performance to the credit card
processors, thereby releasing the cash restrictions.

ACCOUNTS RECEIVABLE

Accounts receivable are primarily due from major credit card
processors and travel agents. These receivables are unsecured.
The Company provides an allowance for doubtful accounts equal to
the estimated losses expected to be incurred in the collection of
accounts receivable.

CONCENTRATION OF CREDIT RISK

Although the Company does not expect losses associated with
supplemental payments recoverable from aircraft lessors, which
are described in Note 10, recoverability of these payments
is dependent on the continued financial stability of its three
lessors and on the Company's ability to perform aircraft
maintenance required for a return of such supplemental payments.

INVENTORIES

Inventories of flight equipment, expendable parts, materials,
tools, food, beverages and promotional items are carried at cost.
These items are charged to expense when issued for use.

In 1996, the Company entered into an agreement with a supplier
for consigned parts and supplies for its Boeing 737-200 and
Boeing 737-300 aircraft. The Company is required to pay a monthly
consignment fee, based on the value of the consigned parts, and
to replenish any such parts when used with a like part. At
December 31, 1997 and 1996, the


<PAGE>



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Company held consigned parts and supplies of approximately
$2,088,000 and $3,943,000, respectively, which are not included
in the accompanying balance sheet. The decrease in the consigned
inventory is the result of the return of the Boeing 737-300
aircraft in 1997. See Note 10.

PROPERTY AND EQUIPMENT

Depreciation and amortization of aircraft improvements and
leasehold costs are recorded using the straight-line method over
their estimated useful lives or remaining lease terms of the
related aircraft, whichever is shorter, ranging from five to
seven years. Reservation system and communication equipment and
other property and equipment are depreciated on a straight-line
basis over the shorter of their estimated useful lives or
remaining lease terms ranging from five to seven years.

AIRCRAFT AND ENGINE MAINTENANCE

The Company accounts for aircraft overhaul and major engine
maintenance costs using the accrual method. The Company accrues
the estimated cost of the next aircraft overhaul based on
aircraft utilization. The actual cost of an aircraft overhaul is
charged to the accrual, with any deficiency or excess charged or
credited to expense. The Company accrues major engine maintenance
based on the greater of engine cycles or flight hours multiplied
by the estimated long-term cost per flight hour or cycle. The
actual cost of engine maintenance is charged to the accrual. The
cost of routine maintenance is charged to expense as incurred.

ADVERTISING COSTS

Advertising costs are charged to expense in the period the costs
are incurred. Advertising expense was approximately $7,792,000,
$4,316,000 and $2,372,000 for the years ended December 31, 1997,
1996 and 1995, respectively.




<PAGE>


1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PASSENGER REVENUE RECOGNITION

Passenger ticket sales are initially recorded as a component of
air traffic liability. Revenue derived from ticket sales is
recognized at the time transportation is provided. However, due
to various factors, including a multi-tier ticket pricing
structure, certain amounts are recognized in revenue using
estimates regarding both the timing of the revenue recognition
and the amount of revenue to be recognized. Actual results could
differ from those estimates.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principals Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its employee stock
options, because, as discussed in Note 4, the alternative fair
value accounting provided for under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not
developed for use in valuing employee stock options.


Pro forma information regarding net loss and loss per share is
required by SFAS No. 123 and has been determined as if the
Company had accounted for its stock options under the fair value
method of that statement. This pro forma information is included
in Note 4.

LOSS PER SHARE

In 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
Under SFAS No. 128, the Company is required to calculate basic
earnings per share based on the weighted average common shares
outstanding, by excluding the effect of dilutive stock
options and to restate all prior periods. In 1997 and 1996, the
computation of net loss per share is based on the weighted-
average number of common shares outstanding. The adoption of SFAS
No. 128 had no impact on the Company, as outstanding stock
options and warrants in these years were antidilutive.  The
aggregate number of options and warrants not considered in the
calculation of net loss per share due to their antidilutive effect
is 28,220,270, 3,223,343 and 1,361,091 at December 31, 1997, 1996
and 1995, respectively.



<PAGE>



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In 1995, net loss per share is based on the weighted-average
number of common and preferred shares outstanding and common
stock equivalents considered "cheap stock" outstanding prior to
the November 1995 effective date of the Company's initial public
offering (the Offering). Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and
preferred stock issued for consideration below the offering price
of $6.00 per share (the Offering Price) and stock options and
preferred stock warrants issued with exercise prices below the
Offering Price during the 12-month period preceding the initial
filing of the Registration Statement are considered cheap stock
and have been included in the calculation of common shares for
the year ended December 31, 1995, using the treasury stock
method, as if they were outstanding in 1995 through the effective
date of the Offering.

INCOME TAXES

The Company utilizes the liability method in accounting for
income taxes, whereby deferred tax assets and liabilities are
determined based on differences between financial reporting and
tax bases of assets and liabilities utilizing enacted rates and
laws that will be in effect when the differences are expected to
reverse.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, restricted
cash and supplemental maintenance deposits reported in the
balance sheet approximate fair value. Based on the guarantee of
the line of credit by certain stockholders of the Company,
management believes the carrying amount of such borrowings
reported in the balance sheet approximates fair value. As a
result of the uncertainties described in Note 2, management is
unable to estimate the fair value of the notes payable to related
parties at December 31, 1997 and 1996. The fair values of
warrants issued in 1997 and 1996, as described in Notes 6 and 8,
were estimated using the discounted Black-Scholes pricing model.

RECLASSIFICATION

Certain amounts in the 1996 and 1995 financial statements have
been reclassified to conform to the 1997 presentation.


<PAGE>



2.   BASIS OF PRESENTATION

The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company
had a net loss and operating cash deficiency of $28,246,003 and
$26,390,316, respectively, for the year ended December 31, 1997.
Further, the Company had a working capital deficiency and
stockholders' deficit of $22,352,910 and $11,944,434,
respectively, at December 31, 1997. These factors have been
present since the Company's inception and, as a result, the
Company has been dependent on financing from its principal
stockholders, which during the period from January 1, 1997
through March 20, 1998, included $3,228,925 in equity
contributions and $32,148,816 in short-term loans. There is no
assurance that these stockholders will provide further financing.
These factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.

Management's plans include raising additional capital and
securing additional bank financing to fund ongoing operations and
the possible expansion of operations. Management's plans also
include actions designed to achieve long-term profitability,
including the reassessment of existing markets, possible
expansion into new markets, pricing strategies to maximize
operating income and cost controls. During 1997, the Company did
not generate sufficient passenger revenue to provide for its
operation's cash needs. As a result, in the third and fourth
quarters of 1997, the Company completed a route restructuring,
including the introduction of service to two new cities. This
route restructuring focused on the Company's strategy of
providing travel alternatives for price sensitive business and
leisure travelers between major metropolitan markets that were
not adequately served by other major carriers. As discussed in
Note 12, the Company has received bridge financing from
certain major stockholders in the form of demand notes payable in
connection with the Company's $3.0 million private convertible
preferred stock offering of equity securities in March 1998.
Management believes these sources of cash will provide for its
cash requirements through the first quarter of 1998. The Company
anticipates generating positive cash flow from operations during
the second and third quarters of 1998. The Company's ability to raise
additional cash through equity or debt financings that may be
required to fund expansion during 1998 or fund fourth quarter
operations will be greatly dependent on the Company operating
profitably during the second and third quarters of 1998.  There
can be no assurance that the Company can achieve such positive
cash flows or operating profits.



<PAGE>


2.   BASIS OF PRESENTATION (CONTINUED)

In addition, there can be no assurance that management's restructuring
efforts or its efforts to provide for the necessary cash requirements of
the Company will be successful. Even if the Company is successful
in restructuring operations, there can be no assurance that
management can provide for the Company's cash requirements which
may be necessary during the remainder of 1998.

Inability to obtain necessary cash from subsequent financings
would have a material adverse effect on the Company, including
the possibility that the Company would have to cease operations.

3.   STOCKHOLDERS' EQUITY

In December 1997, the Company completed a sale of 30,455,714
shares of common stock through a Rights Offering. Under the
Rights Offering, the Company distributed nontransferable rights,
at no cost, to stockholders of record. Each record holder
received two rights, with each right entitling the holder to
purchase one share of common stock for a price of $0.50 per
share. Certain principal stockholders exercised all of their
rights pursuant to the basic subscription and the
oversubscription privileges of the Rights Offering. In lieu of
paying the subscription price in cash, they relieved and
discharged the Company of $12,181,075 in notes payable to related
parties. The cash proceeds to the Company from the sale of the
common stock upon the exercise of the rights offered totaled
approximately $2,994,000, after deducting approximately $53,000
in offering expenses.

In April 1997, the Company completed a private sale of units of
securities, each unit consisting of one share of common stock and
two redeemable common stock purchase warrants. In connection with
the sale, the Company issued 5,150,000 shares of common stock for
aggregate proceeds of approximately $10,235,000, net of offering
costs of approximately $65,000. Included in this private sale
were 5,000,000 shares of common stock issued to certain principal
stockholders in lieu of repayment of $10,000,000 in notes payable
to related parties. Each redeemable warrant originally entitled
the holder to purchase, at any time over a five-year period
commencing with the closing of this private offering, one share
of common stock at an exercise price of $2.50. The redeemable
warrant exercise price was subject to adjustment in the event the
Company issued equity securities raising net proceeds in an
aggregate amount of $1,000,000 at a price below $2.00 per share.
In conjunction with the Company's Rights Offering discussed
above, the redeemable warrants were repriced to $0.50, the
offering price of the common stock in




<PAGE>


3. STOCKHOLDERS' EQUITY (CONTINUED)

the Rights Offering. The Company has the right to redeem the
warrants at a redemption price of $0.05 per warrant on 45 days'
prior notice if the average closing bid price of the Company's
common stock equals or exceeds $1.00 for any 20 days within a
period of 30 consecutive trading days, as defined by the warrant
agreement.

In September 1996, the Company completed a private sale of units
of securities, each unit consisting of one share of common stock
and one redeemable common stock purchase warrant. In connection
with the sale, the Company issued 1,319,774 shares of common
stock for aggregate proceeds of approximately $7,116,000, net of
offering costs of approximately $184,000. Each redeemable warrant
entitles the holder to purchase, at any time over a five-year
period commencing with the closing of this private offering, one
share of common stock at an exercise price of $6.64. The
redeemable warrant exercise price is subject to adjustment under
certain circumstances as defined in the warrant agreement. The
Company has the right to redeem the warrants at a redemption
price of $0.05 per warrant on 45 days' prior notice if the
average closing bid price of the Company's common stock equals or
exceeds $13.28 for any 20 days within a period of 30 consecutive
trading days, as defined by the warrant agreement.

On November 3, 1995, the Company completed the issuance of
2,400,000 shares of common stock at a price of $6.00 per share
through an initial public offering, resulting in net proceeds,
after underwriting commissions and offering expenses, of
approximately $12,956,000. In connection with the Offering, the
Company issued the underwriter warrants to purchase 240,000
shares of common stock at an exercise price of $7.20. The
warrants are exercisable at any time from November 1, 1996 to
November 1, 2000.

In March 1997, the Company held a special meeting of stockholders
and approved an amendment to the Company's Restated Certificate
of Incorporation to increase the number of authorized shares of
the Company's common stock from 15,000,000 to 50,000,000 shares.

The Company's principal stockholders and certain other
stockholders as well as certain officers and directors of the
Company have agreed not to exercise the warrants discussed above
and in Notes 6 and 8 or options granted under the 1997 Program
(see Note 4) until the earlier of June 30, 1998 or the date of a
Certificate of Amendment to the Company's Restated Certificate of
Incorporation is filed increasing the number of authorized shares
of common stock to an amount sufficient to cover all outstanding
and available stock options and stock purchase warrants.


<PAGE>



3. STOCKHOLDERS' EQUITY (CONTINUED)

The Company will reserve, in conjunction with a restated Certification
of Incorporation that the Company plans to amend in 1998, 29,258,961
shares of common stock for issuances related to the exercise of
outstanding or available stock options and outstanding stock purchase
warrants and for shares available under the employee stock purchase
plan as follows:

                                                   NUMBER
                                                   OF SHARES
                                                   RESERVED

  Stock options (Note 4)                        8,277,918
  Stock purchase warrants (Notes 6 and 8)      19,981,043
  Employee stock purchase plan                  1,000,000
                                               29,258,961

4.     STOCK OPTIONS

The Company established the Vanguard Airlines, Inc. 1994 Stock
Option Plan (the 1994 Plan) whereby options for up to 1,700,000
shares may be granted to officers, directors, key employees and
consultants to purchase shares of common stock. Vesting and term
of these options are determined by the Board of Directors and may
vary by optionee; however, the term may be no longer than 10
years from the date of issuance.

During 1997, the Company repriced certain options under the 1994
Plan due to a significant decline in the market price of the
stock from the grant date. The first option repricing occurred on
February 6, 1997 whereby options to purchase up to 76,000 shares
of common stock were repriced to the then current market price of
$1.81. The repricing resulted in an adjusted vesting start date
for all repriced options equal to a three-month extension. A
second option repricing occurred on November 3, 1997 whereby
options repriced on February 6, 1997 and options granted in 1997
to purchase up to 1,037,500 shares of common stock were repriced
to the then current market price of $0.50. This repricing also
resulted in an adjusted vesting start date for all repriced
options equal to another three-month extension.



<PAGE>



4.     STOCK OPTIONS (CONTINUED)

A summary of stock option activity related to the 1994 Plan is as
follows:

                   1997               1996              1995
                        WEIGHTED-           WEIGHTED-           WEIGHTED-
                        AVERAGE             AVERAGE             AVERAGE
                        EXERCISE            EXERCISE            EXERCISE
              OPTIONS    PRICE          OPTIONS   PRICE          OPTIONS   PRICE

Outstanding
at beginning
of year        473,227     $2.40   587,000   $0.17          489,500   $0.11
Granted      2,252,500      1.16   133,500    8.66          147,500    0.35
Repriced    (1,113,500)     2.28     --        --         --            --
Exercised     (107,742)     0.12  (138,302)  0.13          (50,000)    0.30
Forfeited     (239,220)     1.68  (108,971)  0.93            --        --
Outstanding
at end of
year         1,265,265      0.64   473,227   2.40          587,000   0.17

Exercisable
at end of
year           235,033      1.35   202,821   2.55          152,719   0.12
Weighted-
average fair
value of
options
granted
during the
year                        0.56            4.08                     0.84

Exercise prices for options outstanding under the 1994 Plan as of
December 31, 1997 for incentive stock options granted to
employees range from $0.11 to $0.50. The exercise prices for
certain nonstatutory options granted equals $9.25 for 25,000
options and $1.13 for 25,000 additional options outstanding
under the Plan. The weighted-average remaining contractual life
at December 31, 1997 of all outstanding options under the Plan is
8.97 years.

Under a separate stock option program (the 1997 Program), the
Company granted options to purchase 6,973,962 shares of
common stock to certain directors and officers of the Company at
exercise prices ranging from $0.50 to $0.69. Vesting and term
provisions of these options are determined by the Board of
Directors and may vary by optionee; however, the term may be no
longer than 10 years from the date of issuance. There were no
options exercised or forfeited during the year ended December 31,
1997. The weighted-average fair value of options granted under
the 1997 Program is $0.21. At December 31, 1997, there are
1,446,745 options exercisable under the 1997 Program and the
weighted-average remaining contractual life of all outstanding
options is 9.91 years.


<PAGE>



4. STOCK OPTIONS (CONTINUED)

The fair values of options granted after November 3, 1995, were
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
1997 and 1996, respectively: risk free interest rates of 5.78%
and 6.32%, volatility factors of the expected market price of the
Company's common stock of .55 and .61, and a weighted-average
expected life of the option of 2.96 and 3.21 years.

The fair values of options granted prior to November 3, 1995,
were estimated using the Minimum Value option pricing model with
the following weighted-average assumptions for 1995, including a
risk free interest rate of 6.19% and a weighted-average expected
life of four years. Under the Minimum Value model, the volatility
factor is excluded. There were no options granted during the
period from November 3, 1995 to December 31, 1995. Under both the
Black-Scholes and the Minimum Value models, the Company assumed a
0% dividend yield over the expected life of the options.

These models were developed for use in estimating the fair value
of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require
the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those
of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.

For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The effects of applying SFAS No. 123 for pro forma
disclosures are not likely to be representative of the effects on
reported net income or losses for future years. The Company's pro
forma information follows:

                                    1997          1996            1995

Pro forma net loss              $(28,701,314)  $(25,948,409)  $(12,089,631)
Pro forma net loss per share        (1.88)         (2.87)        $(1.63)


<PAGE>


5.     EMPLOYEE STOCK PURCHASE PLAN

Effective January 1, 1996, the Company adopted the Vanguard
Airlines, Inc. Employee Stock Purchase Plan (the Purchase Plan).
Under the Purchase Plan, the Company registered 1,000,000 shares
of common stock for issuance to participating eligible employees.
The Company withholds a specified amount (at least $20.00 per
month and not to exceed 15% of compensation for that particular
month) from the paychecks of participating eligible employees.
The custodian of the Purchase Plan purchases common stock within
five business days of the allocation of the participating
employee's contribution. Any employee who has completed ninety
(90) days of employment with the Company is eligible to
participate in the Purchase Plan. Common stock is purchased by
the employees from the Company at 85% of the fair market value of
the common stock as determined on the last market trading day
prior to the purchase date. Common stock purchased on the open
market is paid 85% by the participating employee and 15% by the
Company.

6.     LINES OF CREDIT

On January 30, 1997, the Company entered into a bank line of
credit (the Agreement) that permitted borrowings up to $2,275,000
with interest payable monthly at the prime rate published in The
Wall Street Journal. As of December 31, 1997, the Company had
borrowed $1,900,000 under the Agreement. The prime rate was 8.50%
and 8.25% at December 31, 1997 and 1996, respectively.  The Agreement
matured on January 30, 1998 and was subsequently paid off. The
Agreement was guaranteed by certain stockholders of the Company (the
Guarantors) for a period of up to two years.

On January 30, 1998, the Company entered into another bank line
of credit agreement (the New Agreement) that permitted borrowings
up to $1,900,000 with interest payable monthly at the prime rate
published in The Wall Street Journal. The New Agreement matures
on January 30, 1999. On January 30, 1998, the Company borrowed
$1,900,000 under the terms of the New Agreement to repay amounts
outstanding under the Agreement. The New Agreement is also
guaranteed by certain stockholders of the Company.


<PAGE>



6.     LINES OF CREDIT (CONTINUED)

In connection with the execution of the Agreement and a related
two-year guarantee, the Company agreed to issue the Guarantors
warrants to purchase an aggregate of up to 2,275,000 shares of
common stock at an exercise price of $1.00. Upon execution of the
Agreement, the Company issued 910,000 warrants that vested
immediately. Accordingly, effective January 30, 1997, the
estimated fair value of the warrants issued of $1,100,000 was
recorded as deferred debt issuance costs in the accompanying
balance sheet and is being charged to expense over the term of
the guarantee. The remaining warrants vest quarterly and the
number is dependent on the amount of borrowings against the line,
as defined in the warrant agreement. In April, July and October
1997, the Company issued in each month an additional 227,500
warrants. Accordingly, effective April 30, July 31 and October
31, 1997, the estimated fair value of the warrants issued of
$197,000, $120,000 and $6,000, respectively, was recorded as
deferred debt issuance costs and is being charged to expense over
the remaining term of the guarantee. Accumulated amortization
related to the warrants totaled $613,348 at December 31, 1997.
Each warrant expires 10 years from the date of issuance. Warrants
for purchase of 262,476 shares expired unexercised and warrants
for purchase of 112,524 shares were forfeited in December 1997 as a
result of the release of one of the stockholder's guarantee.

On July 30, 1996, the Company entered into a bank line of credit
that permitted borrowings up to $4,000,000 with interest payable
monthly at the prime rate published in The Wall Street Journal.
On August 12, 1996, the amount available under the agreement was
increased to $5,000,000. As of December 31, 1996, the Company had
borrowed $5,000,000 under the agreement. The agreement matured on
January 30, 1997 and was subsequently paid off. The agreement was
guaranteed by certain stockholders of the Company (the
Guarantors). In connection with the execution of the Agreement
and related guarantee, the Company issued the Guarantors warrants
to purchase an aggregate of up to 656,250 shares of common stock
at a weighted-average exercise price of $6.65 per share. The
warrants vested immediately and expire on July 30, 2006.
Accordingly, effective July 31, 1996, the estimated fair value of
the warrants issued under the Agreement of $1,850,000 was
recorded in other current assets as deferred debt issuance costs
and was charged to expense over the term of the agreement.

<PAGE>


6.     LINES OF CREDIT (CONTINUED)

In 1995, warrants were issued to certain stockholders related to
the guarantee of a bank line of credit outstanding during that
year. At December 31, 1997, there were 534,091 warrants vested in
connection with the guarantee, originally issued in 1995 at a
weighted-average exercise price of $1.76. Each warrant expires 10
years from the date of issuance. In connection with the warrant
issuance, $71,000 was recorded in other assets as deferred debt
issuance costs and was charged to expense upon the termination of
the related outstanding line of credit in 1995.

7.     NOTES PAYABLE TO RELATED PARTIES

In 1997 and 1996, the Company entered into unsecured demand notes
payable with certain major stockholders of the Company with
interest payable on demand at a rate of 8.00%. As of December 31,
1997 and 1996, unsecured demand notes payable of $9,467,741 and
$2,500,000, respectively, were outstanding.

In July 1996, the Company entered into promissory note agreements
totaling $900,000 with two stockholders at an interest rate of
8.25%. In August 1996, the Company repaid the principal and
interest balance of the notes.

The weighted-average stated interest rate on short-term
borrowings outstanding (excluding deferred debt issuance
costs amortization) as of December 31, 1997 and 1996 equaled
8.00%. The Company had no short-term borrowings oustanding as
of December 31, 1995.  The Company recorded related-party interest
expense (excluding deferred debt issuance costs amortization)
during 1997 and 1996 of approximately $762,000 and $11,000,
respectively. There were no interest payments made to related
parties in 1997 and 1996.


<PAGE>




8.     FINANCIAL INSTRUMENTS

In January 1997, a major stockholder of the Company agreed to
establish a two-year $4,000,000 letter of credit facility in
favor of the Company's credit card processor. As consideration
for establishing the letter of credit, the Company agreed to
issue up to 4,000,000 warrants to the major stockholder to
purchase shares of the Company's common stock at an exercise
price of $1.00. Upon execution of the letter of credit, the
Company issued 1,600,000 warrants that vested immediately.
Accordingly, in January 1997, the estimated fair value of the
warrants issued of $1,900,000 was recorded in other current
assets and is being charged to expense over the term of the
facility. The remaining 2,400,000 warrants vest quarterly
according to the amount of exposure under such letter of credit,
as defined in the agreement. In April, July and October 1997, the
Company issued in each month an additional 400,000 warrants.
Accordingly, effective April, July and October 1997, the
estimated fair value of the warrants issued of $367,000, $211,000
and $14,000, respectively, was recorded as deferred debt issuance
costs and is being charged to expense over the remaining term of
the facility. Accumulated amortization related to the warrants
totaled $1,180,419 at December 31, 1997. Each warrant expires 10
years from the date of issuance. In addition, the Company granted
the major stockholder a security interest in all credit card
receivables processed by the Company's credit card processor.

In May 1997, the Company completed an additional $2,000,000
guarantee facility in favor of the Company's credit card
processor. This guarantee facility expires in January 1999 and
was established by the same major stockholder of the Company. As
consideration for establishing the guarantee, the Company agreed
to issue up to 1,030,928 warrants to the major stockholder to
purchase shares of the Company's common stock at an exercise
price of $1.94. Upon execution of the guarantee, the Company
issued 412,371 warrants that vested immediately. Accordingly, in
May 1997, the estimated fair value of the warrants issued of
$150,000 was recorded in other current assets and is being
charged to expense over the term of the facility. The remaining
618,557 warrants vest quarterly according to the amount of
exposure under such letter of credit, as defined in the
agreement. In August 1997, the Company issued an additional
103,093 warrants, with the estimated fair value of $17,000 being
recorded as deferred debt issuance costs. Each warrant expires 10
years from the date of issuance. Accumulated amortization related
to the warrants totaled $65,000 at December 31, 1997.



<PAGE>




9. INCOME TAXES

A reconciliation of the provision (benefit) for income taxes to
income (benefit) at the federal statutory rate of 34% is as follows:

                                   Year ended December 31
                             1997            1996          1995

Benefit at statutory
  rate                 $ (9,603,640)  $(8,774,744)  $(4,146,480)
State benefit,
 net of federal
 benefit                 (1,304,965)   (1,192,333)    (563,433)
Amortization of
 deferred debt
 issuance costs             724,919       715,001         --
Other                       (39,586)       12,444      (80,137)
Change in valuation
 allowance               10,223,272     9,239,632    4,790,050
                       $      --      $      --     $       --

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31 are as follows:

                                        1997          1996

Deferred tax assets:
Net operating loss carryforwards      $24,264,808   $13,928,498
Accrued overhaul maintenance            3,606,808     2,820,339
Accrued vacation                          172,076       142,308
Amortization of aircraft
 leasehold costs                          451,306       293,243
Other                                     262,757       132,963
Total deferred tax assets              28,757,755    17,317,351

Valuation allowance                   (25,536,269)  (15,312,997)
                                        3,221,486     2,004,354

Deferred tax liabilities:
Prepaid overhaul maintenance            3,029,793     1,842,071
Prepaid insurance                         109,687        99,668
Other                                      82,006        62,615
Total deferred tax liabilities          3,221,486     2,004,354
                                      $     --      $         --

<PAGE>



9.   INCOME TAXES (CONTINUED)

The Company has provided a valuation reserve of $25,536,269 and
$15,312,997 as of December 31, 1997 and 1996, respectively, to
fully reserve for net deferred tax assets in the same amounts due
to the uncertainty of their future realization.

As of December 31, 1997, net operating loss carryforwards of
approximately $62,217,000 are available to reduce income taxes of
future years and will begin to expire in 2009, if unused. The
Company made no income tax payments during the years ended
December 31, 1997, 1996 and 1995.

10. LEASES

AIRCRAFT

From the date of inception through December 31, 1997, the Company
has entered into operating lease agreements (collectively, the
Lease Agreements) for nine Boeing 737-200 and two Boeing 737-300
Series aircraft requiring fixed monthly rental payments. The two
Boeing 737-300 Series aircraft were returned upon expiration of
their respective lease terms in 1997. The Company recorded rent
expense for aircraft of approximately $9,261,000, $10,404,000
and $4,613,000 for the years ended December 31, 1997, 1996 and
1995, respectively.

In addition, the Company is required to make supplemental
payments to the aircraft lessors based on the number of
cycles/flight hours, as defined by the Lease Agreements. Certain
supplemental payments are recoverable from the lessor upon the
performance of required engine, airframe, landing gear and
auxiliary power unit overhauls. At December 31, 1997 and 1996,
the Company has recorded approximately $7,769,000 and $4,723,000,
respectively, in supplemental maintenance deposits recoverable
from aircraft lessors.

The Lease Agreements require the Company to pay the entire cost
of the initial overhauls, even though a portion of the cycles or
flight hours were incurred prior to initiation of the Lease
Agreements. Accordingly, at the inception of the lease, the
Company accrued (as accrued maintenance) the portion of the
estimated cost of the initial overhaul pertaining to cycles or
flight hours incurred prior to inception of the lease. The
amounts capitalized as aircraft leasehold costs totaled
approximately $453,000 for the year ended December 31, 1997.
There was no overhaul component capitalized for the year ended


<PAGE>


10.  LEASES (CONTINUED)

December 31, 1996. The amounts capitalized as aircraft leasehold
costs totaled approximately $620,000 for the year ended December
31, 1995. The capitalized component is being amortized on the
straight-line method over five to seven years, the estimated
lease terms. Amortization totaled approximately $405,000,
$422,000 and $399,000 for the years ended December 31, 1997,
1996, and 1995, respectively.

The Lease Agreements have lease terms ranging from three to seven
years with the option to extend the lease term for certain
aircraft for two to four additional years. The Company exercised
its option to extend the lease term on four Boeing 737-200
aircraft for two additional years effective December 1997. The
Boeing 737-200 Lease Agreements each have an option to purchase
the aircraft at a value defined by the respective agreement.

SALE AND LEASEBACK OF AIRCRAFT ENGINES

In March 1996, the Company made cash down payments of $260,000
and signed promissory notes totaling $1,000,000 to finance the
purchase of two aircraft engines. In July 1996, the Company
restructured these note agreements, whereby the two aircraft
engines were sold back to the vendor and the vendor subsequently
leased the aircraft engines back to the Company. This transaction
was completed in conjunction with the sale and leaseback of two
additional engines. In total, the Company completed the sale and
leaseback of four aircraft engines under operating leases with
terms ranging from one month to four years. The Company has
purchase and lease renewal options at the projected fair market
values under such agreements. As of the date of these
transactions in July 1996, the book values and related long-term
debt of the aircraft engines totaling approximately $1,525,000
and $959,000, respectively, were removed from the Company's
balance sheet. In addition, the Company reduced accounts payable
due to the lessor, a vendor of the Company, by approximately
$567,000. Gains and losses recorded by the Company in conjunction
with these transactions were immaterial. Fixed rental payments of
approximately $13,000 per engine are due monthly. In addition,
the Company is required to make supplemental payments to the
lessor based on the number of cycles/flight hours the engines are
utilized, as defined by the Lease Agreements.


<PAGE>



10. LEASES (CONTINUED)

OTHER

The Company leases facilities as well as office space for its
corporate headquarters from local airport authorities. These
operating leases have terms ranging from one month to five years.
In addition, the Company leases aircraft engines, certain equipment
and other office space. These operating leases have terms ranging
from one to three years. Total rental expense for operating
leases other than aircraft charged to operations for the years
ended December 31, 1997, 1996 and 1995 were approximately
$2,073,000, $1,574,000 and $634,000, respectively.

Future minimum lease payments under noncancelable operating
leases (excluding supplemental payments) at December 31, 1997
were as follows:

          1998                          $11,970,548
          1999                           10,977,050
          2000                            6,488,831
          2001                            4,710,425
          2002                            3,170,000
          Total minimum lease payments  $37,316,854


11.  CONTINGENCIES

The Company is party to various legal proceedings and claims
which arise during the ordinary course of business. In the
opinion of management, the ultimate outcome of these matters will
not have a material adverse effect on the Company's financial
position or results of operations.

12.  SUBSEQUENT EVENTS

Subsequent to December 31, 1997, the Company entered into a
bridge financing arrangement whereby additional unsecured demand
notes payable totaling $3,000,000 were issued to certain
major stockholders of the Company with interest payable on demand
at a rate of 9.00%.

On March 20, 1998, the Company entered into an agreement for the
private sale of units of securities for proceeds of up to
$4,500,000.  Under the terms of the agreement, each unit
consists of one share of Series A Convertible preferred stock
(Series A stock) and one common stock purchase warrant, costing
$10 per unit.  In conjunction therewith, the Company
converted $3,024,000 of outstanding principal and interest on the
bridge financing notes payable, described above, to Series A
Convertible preferred stock under the terms of the agreement.  Each
warrant will entitle the holder to purchase, at any time over a
seven-year period commencing six months after the closing, 40
shares of common stock at an exercise price of $0.55 per share.



<PAGE>


12.  SUBSEQUENT EVENTS (CONTINUED)

The Series A stock will not be redeemable and will pay dividends
at an annual rate of $0.80 per share only, when and if declared
by the Company's Board of Directors. Dividends will not be
cumulative. The liquidation preference of each share of Series A
stock is $10 plus any accrued and unpaid dividends. Each share of
Series A stock is convertible into 20 shares of common stock
(subject to certain antidilution adjustments) at any time
commencing six months after the sale closing, and holders of the
Series A stock will be entitled to voting rights determined on an
as-converted basis.  Under the same agreement, the Company has
the option to sell additional units of securities (amounting to
$1,476,000 as of March 20, 1998) at a price of not less than $10
per unit, provided the agreement for said units is executed not
later than 90 days from the initial closing.

In addition, on March 20, 1998, the Company entered into a Note Exchange
Agreement whereby the major stockholders holding the notes payable
of approximately $9.5 million (see Note 7) have agreed to exchange
their existing unsecured demand notes payable, and all accrued
unpaid interest, for new unsecured convertible demand notes
payable (Convertible Notes). The Convertible Notes are
automatically convertible at $0.50 per share at such time as the
Company has an adequate number of authorized shares available
for issuance.  The remaining terms of the Convertible Notes
remain unchanged.






<PAGE>




         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                     VANGUARD AIRLINES, INC.


                  Balance at              Charged to
                  Beginning    Charged to   Other     Deductions Balance at End
                     of         Costs and  Accounts--     --           of
Description        Period       Expenses    Describe    Describe      Period


YEAR ENDED DECEMBER 31, 1997:

Reserves and
 allowances
 deducted from
 asset accounts:

Allowance for
 uncollectible
 accounts:     $   230,000    $   253,276    $  --   $129,276/1/ $  354,000

Valuation
 reserve for
 deferred tax
 assets:       $15,312,997    $10,223,272    $ --      $--       $25,536,269

YEAR ENDED DECEMBER 31, 1996:

Reserves and
allowances
deducted from
asset accounts:

Allowance for
uncollectible
accounts:      $  197,000     $32,719        $281      $  --      $   230,000

Valuation reserve
for deferred
tax assets:    $6,073,365     $9,239,632     $--       $  --      $15,312,997

PERIOD ENDED DECEMBER 31, 1995:

Reserves and
allowances
deducted from
asset
accounts:

Allowance for
uncollectible
accounts:      $ --          $ 197,000       $--       $ --      $    197,000

Valuation
reserve
for deferred
tax assets:    $1,283,315     $4,790,050     $--       $ --      $  6,073,365



/1/  amounts charged against the allowance for accounts determined
     uncollectible during the year.




<PAGE>


                           SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



                                   VANGUARD AIRLINES, INC.



Dated:  March 27, 1998             By:/s/ Robert J. Spane
                                   Robert J. Spane
                                   Chairman of the Board, Chief
                                   Executive Officer and
                                   President

     We, the undersigned, directors and officers of Vanguard
Airlines, Inc. (the "Company"), do hereby severally constitute
and appoint Robert J. Spane and William A. Garrett and each or
any of them, our true and lawful attorneys and agents, with full
power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to
sign any and all amendments to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, and to
file the same with all exhibits thereto, and all other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents, and each or
any of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully
to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys
and agents, and each of them, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities indicated and on
the dates indicated.

     Signature and Title                          Date


     /s/ Robert J. Spane                          March 27, 1997
Robert J. Spane, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)

     /s/ William A. Garrett                       March 27, 1997
William A. Garrett, Vice President-Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)



<PAGE>



     /s/ Lee M. Gammill, Jr.                      March 27, 1997
Lee M. Gammill, Jr. Director


     /s/ Denis T. Rice                            March 27, 1997
Denis T. Rice, Director




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